Fed Chair Yellen Testimony to Congress – No Rate Hike for Next Couple of Meetings

Higher CD rates will have to wait for at least a few more months. Federal Reserve Chair, Janet Yellen, testified before Congress this past week and make some interesting comments on the economy, including forward guidance on when interest rates will increase.

Yellen told Congress that The Federal Open Market Committee (FOMC) is encouraged by recent economic growth but also realizes the economy is underperforming.

In Yellen's Testimony to Congress, the FOMC assessed that the employment situation been improving in many ways. The unemployment rate now stands at 5.7 percent, down from 10 percent at its peak in 2209. Monthly job gains have picked up and are now averaging 280,00 a month, up from 240,000 a month in early 2014. By the way, job growth was the strongest since the late 1990s.

Source: Bureau of Labor StatisticsOn the negative side, the labor force participation rate is still low for this stage of the recovery. The most recent report released in January showed the participation rate at 62.9 percent.

Another negative is wage growth remains sluggish, which suggests to the fed that some cyclical weakness persists. Progress has been made in the labor market but there remains room for further improvement.

There are other factors also hampering the Fed's decision on when to increase rates. Slowing economies aboard and quantitative easing in the European Union is driving interest rates lower. Current bond yields in Japan and Germany are considerably lower the U.S. yields.

When considering raising interest rates, the FOMC has to balance their dual mandate of low inflation and maximum employment. The unemployment rate is low but the current inflation rate is also well below the Fed's 2.00 percent target.

Core PCE inflation has recently decreased, not only because of low oil prices but also declines in the prices of many imported goods. The Pass-through of lower energy costs is being reflected in lower consumer prices.

Outlook for Higher Interest Rates

The FOMC believes it can be patient in beginning to normalize policy. Therefore the FOMC believes an increase in the federal funds rate isn't likely for the next couple of meetings. The next couple of FOMC meeting are scheduled in late April and mid June.

If the economy continues to improve, which the FOMC believes will happen, then they will "begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis." The FOMC will telegraph this change before it happens in the forward guidance.

The FOMC also made a point on emphasizing that any change to their forward guidance should not be read as a rate hike will happen in the next couple of meetings.

The most rosy scenario, though unlikely, would be an announcement in the March meeting that the FOMC will consider raising the fed funds rate at each policy-making meeting. Then the first rate hike coming in the June meeting.

A more likely scenario would be for the meeting to meeting rate hike change in the June meeting and then an increase coming in the July meeting. The first increase will likely be only 0.25 basis points but could be as high as .50 basis points.

Author: Brian McKay
March 1st, 2015