I'm Still Not Sold On A 2015 Rate Increase

The consensus market opinion after last week's Federal Reserve monetary policy meeting is that the Fed will start to raise short-term interest rates sometime this year, maybe twice, beginning most likely at its September meeting.

I, for one, am still not sold that that will happen.

Last Wednesday's announcement following the Federal Open Market Committee meeting said not much of anything, especially when it came to signaling when it might finally begin interest rate lift-off. The statement gave the usual yadda yadda that economic activity "has been expanding moderately" and that "the pace of job gains picked up." But nothing about rates, other than the usual verbiage that the current federal funds target range of zero to 0.25% "remains appropriate."

Instead, analysts, journalists and investors were forced to look for clues in the "Fed dots," which show graphically where the 17 individual FOMC members expect interest rates to be by the end of this year, next year, 2017 and beyond.

According to the dots, 15 of the 17 officials expect to start raising rates before the end of this year (the Fed doesn't identify which dot belongs to which FOMC member). Five members want to move rates up by 25 basis points by December and another five want to move it up by 50 basis points by then. Two aren't ready to make any move at all this year.

But according to the Wall Street Journal's chief Fed watcher Jon Hilsenrath, back in March only one member saw a 25 basis point increase and seven saw a 50 basis point rise. "The shifts show the center of gravity on the number of rate increases this year is moving down," he wrote, meaning the Fed is now leaning more towards one increase this year, not two.

In other words, it could be argued, the momentum is moving away from any increase at all, not towards one.

Looking further out, for 2016, the median estimate for rates moved down to 1.625% from 1.875% last March, while the median estimate for 2017 fell to 2.875% from 3.125% six months ago.

The reason, of course, is the expected performance of the U.S. economy. The Fed lowered fairly sharply its projections for economic growth this year. Six months ago the Fed predicted the economy would expand by 2.3% to 2.7%. It now expects growth to slow to 1.8% to 2.0%. That's a pretty substantial downward revision. That can't all be blamed on a slow first quarter.

Notably, in her press conference following the meeting, Fed Chair Janet Yellen didn't offer any further insight into when – or even if – the Fed would start raising rates, either September, December or some later date. By contrast, in a speech last month Yellen said "it will be appropriate at some point this year to take the initial step to raise the federal funds rate, assuming the economy continues to improve as I expect."

All of this means is that Yellen – and presumably the entire FOMC – has less faith in the economy now than it did back in March, and is therefore less inclined to start raising rates this year, the dots notwithstanding. The ratcheting down of expected economic growth hardly justifies a rate rise this year, at least not yet.

If we get a bullish run of strong economic numbers over the next several months, then I'll believe it. Until then, I, too, remain data dependent.

Which makes me wonder why the markets keep obsessing about when the Fed will make its next move and what that will be.

Clearly, the Fed still doesn't have enough validation, in its own collective mind, to begin rate liftoff. But even when it finally does and is ready to act, will a 25 basis point increase really matter all that much? Will anyone even feel that? Hasn't the market already priced that in?

Despite what the dots supposedly indicate, I'm assuming that the Fed will not immediately follow an initial 25 basis point increase with another one of the same size. A Fed that has taken this long to raise rates is not going to increase them twice in the span of even a couple of months. It's more likely to wait at least a couple of quarters to see how a tiny increase affects the economy before it risks doing so again.

So let's just relax.

Visit back to read my next article!

George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.