If you were betting for an interest rate increase by the Federal Reserve yesterday, then you know you lost. On Wednesday, the Federal Reserve maintained its benchmark interest rate near zero.
Before you start celebrating, the Fed made it quite clear that they believe that the growth in the U.S. economy warrants at least one or two increases in the interest rate before the end of 2015.
Yellen also went on to comment that the U.S. economy managed to survive the “soft patch” of the 1st quarter. Added to this, Yellen stated that while the downward pressure on inflation due to the lower energy prices has alleviated and while the labor market is improving, the Fed is still looking for additional progress before rates are raised.
The outcome of the 2 days of talks made it quite evident that the Fed officials are optimist about the U.S. economy. This was evident by the fact that most of these officials would still like to see a rate increase this year while only 2 out of the seventeen members think that the central bank should wait until next year.
Interestingly, the rate projections from the Fed officials were mixed regarding the ‘dot plot’. Currently, the dot plot still showed rates rising by the end of this year to a median level of 0.625 percent.
According to Eric Green, the head of economic research at TD Securities, this means that there is an implication for two rate hikes in 2015. In comparison, only 7 of the Fed officials believe that there will only be one rate hike this year.
As a result of these mixed opinions, trading was volatile and we saw an increase in the S&P 500 index (SPX) of 0.2%, or 4 points, to 2,100.36 by the close of trade. Also, the U.S. dollar (USD) declined.
The bottom line is the Federal Reserve made it quite clear that once they are confident that inflation is moving higher and that there is a clear improvement in the labor market, only then will the rates be increased.
Yellen also reminded investors that a hike in interest rates is a positive sign since it sends out a clear message that the economy is now emerging from the financial crisis.
With all this said, there are only 4 more Fed meetings scheduled for this year which will take place in July, September, October and December. So which one of these months is your money on for a rate increase?