Fed Policy, Rate Hike, In Focus As July FOMC Meeting Concludes

fED MINThe U.S. Federal Reserve will be wrapping up their 2 day meeting later today at 2:00 p.m. EST followed by a released policy statement that could offer some insight about how Fed committee member are viewing the health of the economy.

Three rounds of quantitative easing have come and gone since December 2008 and now investors are clamoring around the likelihood of interest rates returning to a period of normalization and the federal funds rate moving above historic lows just above 0 percent to 1/4 percent in the midst of an improving U.S. economy and labor market.

On July 2nd, the U.S. Labor Department reported that in June the U.S. unemployment level dipped to 5.3 percent while 223,000 jobs were added to the economy, compared with an average monthly gain of 250,000 over the prior 12 months.

By contrast, in October 2009 the U.S. unemployment rate climbed as high as 10.2 percent, roughly 5.3 percentage points higher since the start of the recession in December 2007, and the highest rate since April 1983.

Besides monitoring the labor market, the Federal Reserve also keeps a watchful eye on inflation and still expects it to rise close to its 2 percent inflation target.

But due to a weak first quarter (first 3 months of 2015) GDP that saw cold U.S. winter weather slow business activity to -0.2 percent  growth combined with low energy prices from oil prices dropping, inflation projections have remained moderate for 2015.

Fed Committee members projected in March that PCE inflation would rise 0.6. to 0.8 percent.

Core PCE inflation, which excludes volatile food and energy costs, was projected to fall in the range of 1.3 to 1.4 percent in 2015 before rising to 1.5 to 1.9 percent in 2016.

Oil prices have not exactly rebounded over the past several weeks and are currently trading near March 2015 levels, adding to some low inflation pressure in the market.

That combined with the U.S. dollar strengthening in the wake of the debt debacle in Greece, ongoing quantitative easing in the euro zone, and slower growth in China may cause the Fed to wait about sending out signals for an upcoming rate hike in September.

Debate is centering around a small interest rate hike in September or December, or possibly even during both months when Fed Chair Yellen is scheduled to hold press conferences.

Fed Committee members often state in writing on policy documents that they are not on a “preset course” and changes with Fed policy depends on future economic data.

That type of ambivalent language could be seen in today’s policy statement.

On Thursday the Fed will soon be digesting the advanced reading of the 2nd quarter U.S. GDP from the Commerce Department when cold weather was not a major factor.

Economists from briefing.com forecast 1.3 percent GDP in the 2nd quarter during Thursday’s advanced reading.

-John Schweitzer



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