Expectations of rate hike in 2015

Entering 2015, most economists expected that the Federal Reserve would finally begin raising short-term interest rates. Fewer than two weeks in to the year and that thesis is already beginning to crumble.

For seven years, the Fed kept interest rates at rock-bottom levels and employed a massive money-printing program called Quantitative Easing in the hopes of boosting the money supply, expanding credit, and causing inflation to jump-start the economy (so the theory goes). Many experts have long waited for the Fed to “normalize” policy and raise rates, for reasons that include a desire to stop expanding the money supply, and wanting the Fed to have a cushion to lower them once again when another crisis occurs.

By the way, all this talk and debate about Fed policy surrounding “rates” actually only refers to one specific interest rate: the federal funds rate, that is currently at 0.25%. This is the rate at which banks and similar institutions trade their balances held at the Federal Reserve on an overnight basis and without collateral. In other words, this is the shortest term rate, and it is the only interest rate the Federal Reserve has direct policy control over.

The reason why analysts outside the small circle of institutions that actually interact with the federal funds rate care about it is so deeply is because raising or lowering it usually has a ripple effect in the same direction on all other longer term rates, like the discount rate, U.S. bond yields, and mortgage rates. Equity and debt markets, both domestic and foreign, are all affected by the raising and lowering of the federal funds rate.

Essentially, the Fed’s decision to raise rates has a real impact on every single person in the country, from the “bond kings” down to the hourly wage earners. But don’t count on that rate hike coming any time soon.

Market ignoring Janet Yellen's possible rate hike in 2015

With the economy growing and Fed Chair Janet Yellen poised to raise interest rates, calls for higher yields are the most aggressive since 2009, when U.S. debt securities suffered record losses, according to data compiled by Bloomberg.

Next year should be the break-out year finally,” a financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said. “The market is ignoring the rhetoric that Yellen and the FOMC is getting closer and closer to tightening. The market has it wrong.”

Interest rate hike might not happen in 2015

Last week, the Federal Reserve made its last monetary policy announcement of the year, removing the phrase "considerable time" and replacing this with "patient."

Regarding the labor market, Janet Yellen said that overall the labor market has improved, and noted that underutilization of labor resources continuing to diminish. 

On the broader economy, Yellen said that real GDP expanded 2.5% over the four quarters ending in the third quarter, with indications showing the economy continues to grow at that pace. 

Yellen noted that the decline in oil prices "will likely hold down overall inflation in the near term." Yellen added that "as oil price declines and other transitory factors dissipate" the Fed expects inflation to move back towards its 2% target.

The Fed has noted the decline in the "market based" measures of inflation — i.e. breakevens — and said these too look transitory, though these do bear close watching. 

Yellen said that the Committee expects it will be appropriate to maintain its current policy stance "for at least the next couple of meetings."

Yellen said that most FOMC members, however, believe that it will be appropriate to begin raising rates at some time in 2015, but that the time of year depends on the economic situation.

At the time of lift off, FOMC members expect to see a further decline in the unemployment rate, with "core" inflation running near current levels, but remain confident that inflation will run back to target levels.

Yellen still maintains the view that interest rate hikes will continue to depend on incoming data.

"Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."

Unlikely for rate increase until mid 2015

Federal Reserve Chairwoman Janet Yellen recently ruled out an increase in interest rates until April 2015 at the earliest.

Yellen said Fed policy makers thought it was “unlikely” the economy would show enough vigor to justify the first rate increase since 2006 “for at least the next couple of meetings.”

Asked how many meetings equals a couple, Yellen was emphatic: two.

The Fed’s next meeting is in late January. After that, the Fed does not meet again until March 17-18.

The third meeting of the year takes place April 28-29, with another strategy session in June.

Of course, the Fed could always rates earlier if the economy grows strong enough. But it appears the central bank really is prepared to be “patient” as its latest statement suggests.

And once the Fed does begin to raise rates, Yellen and her colleagues think they will move a bit slower than they previously expected.