The Federal Reserve releases a policy statement later in the day, and financial markets will be glued to the language. No one expects the first interest-rate hike in nine years, but the statement and a press conference by Chair Janet Yellen should hint at when that day finally comes.
What to Watch:
The Fed’s benchmark federal funds rate was lowered to near zero in December 2008 and has not budged since. That rate influences borrowing costs across the economy, and those costs remain at near historic lows. They will begin rising with rate hikes.
Analysts began the year expecting the first rate hike to come at this month’s two-day meeting of the rate-setting Federal Open Market Committee.
But the economy actually shrank in the first three months of the year, because of a harsh winter, weak exports and a strong U.S. dollar that has made U.S. goods and services more expensive abroad.
Why Now:
For the past six weeks, economists have increasingly been debating whether the Fed will raise rates in September or wait for more evidence of a strengthening economy and hold off until December.
“The tone of this week’s policy statement, as well as the economic outlook and press briefing, is crucial to our projection that the Fed is close to raising interest rates for the first time in nine years,” Sam Bullard, an economist with Wells Fargo Securities, wrote in a preview note to investors.
Given that the Fed wants to signal its first move on rates well in advance, conventional wisdom has it that the Fed must signal now what it expects to do in September.
“Key to setting the stage for a September rate hike is an affirmation that the slowdown at the start of the year was temporary and growth has re-accelerated as anticipated,” Mark Zandi, chief economist for forecaster Moody’s Analytics, told McClatchy. “This is clear in the recently stronger job gains and better retailing and housing statistics.”
Why It’s Happening:
The Fed statement is likely to include language on a labor market that’s rebounding amid more robust hiring, improving wage growth, and some well-anchored expectations that inflation is under control. Those factors all signal that a rate hike is finally in the offing, a move that will lift borrowing costs eventually across the economy.
“They may also mention that the value of the dollar has leveled off. A too-quickly rising dollar was creating some nervousness about raising rates,” said Zandi, who said he is confident that the economy is regaining its stride. “All the criteria for the Fed to begin raising rates in September are in place.”