With the Fed’s quantitative easing program slowing down at a pace of $ 10 billion per month and set to officially end in October, the focus for the market has now shifted to the Fed’s interest rate policy with short term interest rates, another stimulus measure designed to help improve the U.S. economy.
Since December 2008 the Fed has continued to maintain the federal funds target of zero to 0.25 percent, historic lows meant to stimulate lending and business activity as the U.S. dollar weakens in the midst of accommodative actions undertaken with the Fed’s monetary policy.
Economists are expecting the Federal Reserve to raise short-term interest rates in 2015, either late in the first quarter (spring) or second quarter (summer) and will scrutinize the language contained in the upcoming Fed statement along with Fed Chair Janet Yellen’s follow up interview.
The widely cited “considerable time” statement could be used again in the upcoming statement for the Fed’s timeline or it may eliminated, suggesting a more hawkish tone and outlook.
But economists and investors alike will be looking to the Federal Reserve to provide some type of guidance and roadmap for the Fed’s policy with interest rates.
During the release of the Fed Minutes from the July FOMC meeting, Fed Committee members struck a more hawkish tone about the economy after acknowledging an improving job market and rising inflation that is moving closer to its 2 percent target.
“The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
However, Fed Committee members also pointed out that aspects of the labor market still remain weak and challenges persist with a slow recovery in the housing market that is largely uneven across the U.S.
Fed Committee members highlighted that a range of labor market indicators suggests that there remains “significant underutilization of labor resources” which could be a topic for further discussion from Fed Chair Janet Yellen in Wednesday’s interview with reporters.
The U.S. economy added only 142,000 non-farm payroll jobs in August, the smallest increase since December, falling lower than the average monthly gain of 212,000 over the past 12 months while the unemployment level was 6.1 percent.
On Wednesday China’s central bank added more stimulus by injecting $81 billion or 500 billion yuan into the country’s five largest banks as growth slows in the world’s second largest economy.