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Fed meeting kicks off Tuesday; here’s why it shouldn’t raise rates

Nicole Goodkind
Nicole Goodkind

The Federal Reserve’s two-day policy meeting kicks off tomorrow and investors everywhere will be eagerly awaiting any guidance about when The Fed might begin raising interest rates. Though sources close to the matter believe that the FOMC is coming close to finalizing its plan to wind down the last of its stimulus program, it’s unlikely that anything will be announced this week. The Fed is still on track to end its bond-buying program in October.

There has been a bit of good economic news recently, indicating to some that the Fed might make haste to raise interest rates ahead of the current mid-2015 consensus. Asset markets are booming and the unemployment rate has come down to 6.1%. Some Fed-watchers say this is the time to raise interest rates.

Short-term interest rates are currently pegged between 0% and 0.25%, this would be the first rate-hike since December, 2006.

‘Waiting and seeing’

The Fed is getting to the point where they might want to indicate that tightening is coming, says Martin Wolf, chief economics commentator at the Financial Times, “but I see no need for it.” Until the Fed fully winds down its bond-buying program, it will be very unclear how strong the economy actually is, says Wolf, who doesn’t think labor numbers are as clear as they could be.

“It seems to me that the right thing for the Fed to do would be to say, ‘We’re waiting and seeing,’” he says. Wolf does not believe that now is the time to make any forward movement. If the Fed does so, he says, it’s likely that they will reverse economic progress.

‘Considerable Time’

In March, the Fed stated that it, “continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

Watchers will be scanning that paragraph to see if the words “considerable time” language has shifted at all, indicating that the current timetable has changed.

The members of the FOMC appear to be split on the idea, with Atlanta Fed President Dennis Lockhart telling MarketWatch that there would be “some meetings” before rates changed and Philadelphia Fed President Charles Plosser openly dissenting against the current wording.

A paper released last Monday by the Federal Reserve Bank of San Francisco concluded that, “the public seems to expect more accommodative monetary policy than the Fed suggests,” and stoked fears that change is coming.

Still, Martin Wolf might say it best when he remarks, “Predicting what they will do, I suspect that’s a mutt’s game.”

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