Why We’re Still Waiting for Liftoff at the Fed
With 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.