So Why Haven’t We Seen a US Rate Hike Yet this Year?
Brace Yourself, A Rate Hike Is Coming: But When?
Expectation of a rate hike
We mentioned in the first article of this series that the Fed’s bond buying program ended in October 2014. Since then, there’s been speculation about a rise in the target range of the federal funds rate. But nothing happened in October 2015—the last time policymakers met. The main reason for the delay is a lackluster economy.
Economic indicators
In June, most market participants expected the Federal Reserve to increase the target range of the federal funds rate. But the situation at that point didn’t support a rate hike. Even though crude oil prices (XOM) (COP) (KMI) (CVX) had nosedived, consumers didn’t spend those savings, leading to tepid consumer spending. Since consumer spending is the lion’s share of US economic output, a poor showing here meant a direct hit on the GDP.
The fall in crude oil prices also affected inflation. Policymakers maintained that inflation will remain low in the near term and only rise moderately in the medium term due to downward pressure from oil prices. A fall in import prices was responsible for driving down core inflation, which excludes food and energy prices.
The US labor market was the only part of the economy doing well, except for a few hiccups. But all was not well there either. Slack remained in the labor market and wages were showing anemic growth.
What has changed since then?
In June, some people expected a September rate hike. But a meltdown in China and geopolitical concerns held off the rate hike. Towards the end of September, US equities were hurting, with the year-to-date performance of mutual funds like the Wells Fargo Advantage Premier Large Company Growth Fund – Class A (EKJAX) turning negative.
But two things have changed:
Consumer spending has made a comeback.
Labor market slack has come down a bit.
It’s the latter change that’s been in the news recently. Let’s see why it could be the tipping point for a rate hike.
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