4 Reasons Why the Fed is Considering Raising Rates Again this Year


The last time the Federal Open Market Committee (FOMC) raised the benchmark rate was in June of this year. The Federal Funds Rate was upped to 1.25 percent and was unchanged after the most recent FOMC meeting in September. Here are the interesting results of the latest FOMC meeting as well as four reasons why the Fed is considering raising interest rates again in 2017.

What Happened at the Last FOMC Meeting?

The FOMC met in September and decided not to change the Federal Funds rate at that time. The sentiment among committee members was that another rate hike could occur this year as well as up to three increases in 2018. Instead of raising interest rates in September, the Fed used this latest meeting as an opportunity to begin a program that it is calling "normalization."

When the economy was struggling to emerge from Great Recession after the latest stock market crash, the FOMC not only slashed interest rates to near zero (0.25 percent), but it also boosted the economy with a stimulus package. Specifically, the Fed purchased $4.5 trillion worth of securities and bonds, in a program known as "quantitative easing." The Fed now believes that the economy is strong enough that it no longer needs this crutch.

Starting in October, the Fed will begin their "normalization" program, which means the agency will start unwinding this massive balance sheet. The Fed will begin by selling off $10 billion per month and accelerate sales into and beyond 2018. While Fed Chair Janet Yellen believes that the effects of this action will be akin to "watching paint dry," others are not so sure. Some experts believe that this program could push long-term interest rates up over the next few years. Yellen has at least expressed the willingness to alter course should conditions change.


Four Reasons Why the Fed May Raise Rates Again This Year

When the FOMC met in September, 12 of 16 officials expected that there would be another rate hike this year. Most experts believe that the increase will come in December, and will likely be a bump to 1.50 percent. Here are the four reasons why the Fed is probably going to initiate that rate hike before year's end.

1. Inflation. One of the primary reasons that the Fed adjusts interests rates is to influence inflation. The target figure is 2 percent annually, and we are currently below this figure at 1.7 percent year over year as of August. Janet Yellen states that she doesn't know why inflation appears to be stalled at this level, but it is close enough to 2 percent that the Fed won't put off another rate hike because of inflation.

2. Economic Growth. The Fed would like to see a certain amount of economic growth each year, ideally between 2 and 3 percent. One of the reasons that the Fed didn't raise interest rates in September was because of the major hurricanes that had just hit Texas and Florida. Not only will those storms impact the nation's major insurance companies, but the hurricanes have also caused oil prices to go up. The good news is that these economic disruptions are expected to be short-term, with quarterly growth estimates slashed by major banks such as Bank of America-Merrill Lynch. Since there won't be many long-term economic impacts from the storms, the likelihood of a rate increase later this year goes up. The Fed believes that the economy, and particularly the economy during the holiday season, will be robust enough to warrant another rate hike towards the end of the year.

3. Unemployment. The Fed will likely raise interest rates again because we are currently experiencing unemployment at a 16-year low. Current unemployment in this country is at 4.4 percent as of August. This is excellent news even though pay has only increased 2.5 percent in the past year for hourly workers, where growth is typically as high as 4 percent. These high employment figures actually offset some of the concerns about slow growth and lower inflations rates.

4. Financial Condition. The last reason that the Fed is likely to raise interest rates is concern about a potentially overvalued stock market. Low interest rates have allowed publicly-traded companies to finance trillions in share buybacks, which has inflated some share prices beyond their true values. By increasing interest rates, those buyback programs will be more expensive, so should slow down.

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