When Will the FOMC Start Increasing Rates and How High Will They Go?

Most analysts believe the Federal Reserve will increase rates sometime in 2015. What is unclear is not only when rates will be increased but by how much and how quickly rates will move higher. Back in December 2008, The Federal Open Market Committee voted to decrease the fed funds rate to a targeted range of zero to one quarter percent, where it remains today.

The rate was lowered to near zero percent in order to help the economy recover from the financial crisis and the deepest recession since the Great Depression. In fact the recession came to be known as the "Great Recession." Now that the economy is finally gaining traction and job growth is at the strongest point since 2006, the time is almost near for the Federal Reserve to increase the federal funds rate.

Last year, the general censuses was that the rate would be increased sometime towards the end of 2015. That timeframe was moved up to sometime in the middle of the year as the unemployment rate fell further and inflation picked up. Some are even suggesting the rate will move higher in the first quarter of 2015.

Federal Reserve Bank of St. Louis President, James Bullard, has predicted the Fed will raise interest rates starting in the first quarter of 2015. Bullard's prediction is sooner than most other Fed officials believe the rate will be increased. In an interview with Fox Business Network, he was asked when he thinks the rate will be increased. His response was, “I’ve left mine at the end of the first quarter of next year.”

Bullard also said “The Fed is closer to its goal than many people appreciate, we’re really pretty close to normal.” He predicted the jobless rate may go below 6 percent and inflation may rise near 2 percent by the end of 2014. Regardless of when interest rates move higher, retirees who rely on deposit interest for income will be relieved to see higher rates.

The Federal Open Market Committee has three more meetings scheduled for 2014 in September, October, and December. We won't see any announcements of a higher fed funds rate after these meetings. During the first quarter of 2015, the FOMC is scheduled to meet in January and March. The first increase in the fed funds rate will likely be announced after the March meeting.

How much the rate is increased remains to be seen but I believe the first increase will probably be 0.50 percent and two or three subsequent increases will also come in 0.50 percent increments. The reason being that a zero percent rate is so accommodating to growth that to get to just a neutral place for the fed funds rate, the fed will need to act quickly.

Depending on the unemployment rate, wage growth, and inflation, we could see the fed funds rate somewhere between 2 and 3 percent by the end of 2015. A 2 percent fed funds rate would send 1 year bank CD rates over 2 percent and probably as high as 3.00 percent. A 3 percent fed funds rate would send 1 year CD rates towards 4.00 percent. We haven't seen 1 year rates in the 3 percent to 4.00 percent range in over 6 years.

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Author: Brian McKay
August 13th, 2014