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Why We’re Still Waiting for Liftoff at the Fed

shutterstock_167426885With few expecting the initial interest rate increase in June, it was no big surprise yesterday that no actions were taken at the FOMC June meeting. The meeting statement contained no language change about the central bank’s plans.

By looking at different aspects of the economy, we see several factors that weigh on later lift-off. They are:

  • GDP over the first quarter of 2015 contracted 0.7 percent, and the Fed lowered its projection of GDP for 2015 compared with the March projection.
  • Core PCE inflation was little changed in recent months, and the Fed’s June projection of core PCE in the coming years remained unchanged.
  • Household real disposable income growth remained sluggish. It rose 0.2 percent on average for the first quarter of 2015, compared with 0.5 percent in the fourth quarter of 2014.
  • The U.S. dollar stabilized, but still remained strong, continuing to weigh on exports.

On the other hand, some factors that keep the Fed on track to raising interest rates are:

  • The labor market kept improving, with the unemployment rate coming down to 5.5 percent, near the natural unemployment rate.
  • Household spending regained its momentum after the slowdown in earlier this year.
  • Nonfarm labor productivity decreased at a 3.1 percent annual rate during the first quarter of 2015, following a decline of 2.1 percent in the fourth quarter of 2014.
  • Consumer sentiment came in strong this year, compared with 2014.

The economy overall shows a healthy momentum. With 15 of 17 Fed officials expecting to start raising short term interest rates before the end of this year, we believe that there is still a good chance that the lift-off will happen later this year.

3 Comments Post a comment
  1. Gilbert W. Chapman #

    It is indeed interesting to note that the ‘natural unemployment rate’ is now considered to be 5% (+/-) . . . Rather than the 4% considered ‘normal’ in the seventies, which had been the benchmark for decades.

    To paraphrase the opening line of the ancient mystery radio program,’The Shadow’ ~ “What evil lurks in the minds (hearts) of the Fed’s wo/men (Shadow) ? . . . Only Paul, Alan, Ben, and Janet know for sure.”

    Is it possible that the reason for raising the rate to 5% is political, rather than anything to do with applied economic realities ?


    June 18, 2015
  2. Here is a working paper from the Congressional Budget Office, trying to discuss the factors that would affect the natural unemployment rate.Hope you find it interesting.


    June 22, 2015
    • Gilbert W. Chapman #

      I sincerely appreciate your response . . .

      I did indeed find that CBO working paper to be very, very interesting . . . Apparently the CBO believes that the natural unemployment rate (NUR) is no longer ‘fixed’, but because of numerous variables the NUR is a ‘floating rate’, subject to being redefined periodically.

      But . . . I wonder . . . Should some 22 year old male who plays around all day on his computer ‘buying/selling items’, or who is a ‘stock market day trader’, really be considered unemployed, or is he just too lazy to go out and get a real job ? ? ? . . . Just a thought . . .


      June 22, 2015

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