The burning question with regard to a rates hike by the Fed is not if, but rather, when this will happen.
The consensus among private economists according to a survey conducted by the Wall Street Journal last week found that 72% expect a rates hike to be announced at the September meeting of the Federal Reserve.
Referring to the current Fed meeting, John Bellows, portfolio manager at Western Asset Management, said, “Our expectation is that the Fed is going to reiterate a desire to hike interest rates this year and signal it expects two hikes this year. Next year, they are currently expecting something like four hikes. I don't think that’s going to change. I think it's two hikes in 2015 and four hikes next year.”
The Fed is also due to issue a new “dot plot” which gives an indication of interest rate projections by the seventeen Fed officials. Expectations are that this will show a slower course of rate hikes.
Market sentiment seems to indicate expectations that the Fed will hold rates lower for a longer period of time, with a much slower rate of increase in any hikes. This was further underlined with the Dow (DJIA) up 113 to 17,904 and the S&P 500 index (SPX) up 11 to 2,096.
A further indicator that traders don't expect a rates hike in September is provided by the CME Group's FedWatch tool which shows that futures traders are pricing a 28% probability of a September hike into their calculations.
Josh Shapiro, chief U.S. economist at MFR, Inc., had a different take on a September rates hike by factoring in the political implications surrounding that time of year. The federal government's new fiscal year begins on the 1st of October and the uncertainty regarding fiscal brinkmanship could influence a Fed decision.
Shapiro said, “We have budget politics, and presidential politics and everything else colliding [during September]. Fiscal policy is completely off the rails. There might be risk of a government shutdown. Is that really the environment they want to be in pulling the trigger for the first time?” For these reasons, Shapiro feels that a rates liftoff will take place either in July or in December this year.
The press conference and announcements after today's Fed meeting will hopefully put an end to a lot of the speculation with more substantial information on the way forward with regard to interest rates.