Fed Chair Janet Yellen will be testifying on Capitol Hill before Congress on Tuesday and Wednesday about Fed policy issues as U.S. lawmakers seek more transparency with the Federal Reserve’s actions and investors await for signs about when an interest rate hike may arrive in 2015 which would be the first rate hike since 2007.
In December 2008 during the depths of the recession, the Federal Reserve took highly accommodative actions and cut the federal funds rate from 1 percent to a range of 0 to .25 percent in an effort to boost lending and to stimulate economic growth.
The move was widely praised and achieved its goal of creating better economic conditions for a global recovery to take hold.
Six years later, the U.S. unemployment rate has fallen to 5.7 percent compared to 7.3 percent in December 2008 and 10 percent in October 2009.
2014 was America’s best year for job growth since 1999.
In the fourth quarter of 2014, U.S. GDP was at 2.6 percent, according to the first estimate from the U.S. Department of Commerce.
The two primary economic metrics that the Federal Reserve uses to develop monetary policy is the employment picture and inflation.
Although it’s true that the U.S. employment market has rebounded since the recession in 2008-09′, inflation has not increased substantially over the past 3 years and still remains below the Fed’s 2 percent inflation target due to a confluence of factors such as weaker global growth, plummeting oil prices, and a rising U.S. dollar.
The primary inflation reading that the Federal Reserve uses when determining monetary policy is the core personal consumption expenditures (PCE).
“The committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is the most consistent over the longer term with the Fed’s statutory mandate” the Federal Reserve wrote.
Inflation as measured by the price index for personal consumption expenditures (PCE), has experienced downward pressure over the past 2 months which may complicate the Federal Reserve’s resolve to hike rates in mid-2015, a time period when a majority of economists and investment bankers were forecasting a rate hike.
The latest PCE reading is 1.33 percent for December, lower than 1.40 percent for November, and 1.51 percent for October.
According to the latest Fed minutes from the Fed’s January 27-28th meeting, Fed officials believe that although inflation may dip a little in the short term, it is expected to gradually rebound closer to the Fed’s 2 percent target.
“Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate” according to the latest Fed statement.
It is also true that Fed officials sounded more dovish in their last January Fed meeting when they emphasized that the Committee can be “patient” about normalizing monetary policy with interest rates and await more economic data.
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated” according to the Fed’s last statement.