Fed No Longer Patiently Waiting to Hike Rates

By Ryan Dosen

 

The Federal Reserve is no longer assuring the public and markets that it will be “patient” in raising interest rates. Fed Chair Janet Yellen did not give us an exact time frame for the rate hikes, but she did open the door for rates moving upward as early as June of this year. Many experts do not foresee rate hikes coming in June, but they are coming. The question is: when?

Neither Patient Nor Impatient

Up until its most recent announcement regarding U.S. monetary policy, the Fed’s message was that it was going to be “patient” in raising the federal funds rate, which still sits in the current 0 to ¼ percent target range. The federal funds rate is the interest rate at which a depository institution/bank lends funds maintained at the Federal Reserve to another depository institution overnight. When the Fed raises the cost for banks to borrow money, the interest rates banks’ customers will pay will follow suit.

In this week’s announcement, the Fed notably removed its pledge to be “patient” in raising rates.

However, Yellen stated that “just because we removed the word ‘patient’ from the statement doesn’t mean that we are going to be impatient.” Yellen further stated that the Fed’s “modification of the forward guidance should not be read as indicating that the committee has decided on the timing of the initial increase in the target range for the federal funds rate.” She also said that “this change does not mean that an increase will necessarily occur in June. Although, we can’t rule that out.”

Basically, Yellen doesn’t know when rates will move. Or, if she does, she is being coy and isn’t sharing.

The Fed’s View on the Economy

This week’s Fed monetary policy release stated that since it last met in January, economic growth “has moderated somewhat.” Despite the lackluster signs of growth, it was noted that household spending is “rising moderately” and that “declines in energy prices have boosted household purchasing power.” In sum, people are spending a little more money, and lower gas prices certainly are a contributing factor.

FOMC Policy and Goals

The Federal Open Market Committee (FOMC) designs its monetary policy around the objectives of maximum employment and 2 percent (core) inflation. Core inflation measures inflation while excluding certain items, such as food and energy that are more likely to experience temporary price shocks that could skew the inflation numbers.

By keeping the federal funds rate around zero, the Fed has hoped to make borrowing easier and to boost a stubbornly low inflation rate. The Fed expects inflation to remain near its recent low levels “in the near term,” but it “expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of energy price declines and other factors dissipate.”

One could read between the lines and hypothesize that if inflation is expected to remain below the Fed’s target range “in the near term,” then we are unlikely to see a rate hike in the near future.

With regard to the objective of maximum employment, the Fed also noted improvements in the labor market with “strong job gains and a lower unemployment rate.” Unemployment now sits at 5.5 percent.

The Fed had previously said that it expected inflation to accelerate when inflation hit this mark. Since we are not seeing accelerating inflation, the Fed is now saying that unemployment could fall as low as 5 percent to 5.2 percent before inflation pressures starts to build.

This last little tidbit would seem to be yet another indicator that while the Fed is no longer “patiently” waiting to raise rates, it is also probably not on the cusp of raising rates, either.

“Bluffing” Fed

Peter Schiff, CEO of Euro Pacific Capital, says that talk of the Fed’s imminent raising of rates is unfounded. Schiff says that “the Fed has been bluffing the entire time. It has no intention of raising rates.” He says that “many people are settling for part-time jobs and low-paying jobs” and that the unemployment numbers aren’t true indicators of the employment picture. He claims that widespread underemployment is one of many reasons why the Fed will not raise rates.

Shiff also predicts QE4, the collapse of the dollar, and a currency crisis that will “make 2008 look like a Sunday school picnic.”

A Little More Time to Capitalize on Low Rates

Schiff is part of a minority that thinks the sky is falling. The majority would probably agree that the Committee is not going to raise rates before or even at their June meeting. The economic, unemployment, and inflation numbers also support the notion that rates will stay down at least for a little while, probably through the end of the year.

If you’re looking to buy this year, you can probably expect to enjoy the benefits of the low rates we are seeing today (which sit around 3.91 percent for a 30-year fixed). Similarly for sellers, due to the low rates, more buyers will likely be able to qualify to buy your home. However, once we pass the near term, where rates will be is anybody’s guess.

 

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.