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June Rate Increase Is Still A Likely Scenario

Fed BuildingAs widely expected, the Federal Reserve did not raise interest rates at its meeting today. The market is anxious for any signals of the Fed’s policy direction in the near future.

The steady economic growth, an improving labor market, along with a positive outlook for future inflation would point toward the next rate increase coming in June.

Digging deep into the post-meeting statement and the Fed’s projections, several elements, in my opinion, underscore the likelihood of a June increase.

  • Fed officials had a positive outlook for real GDP growth this year. The March projections reveal the Fed’s expectation of 2.2 percent growth in real GDP for 2016, higher than its projections for 2017, 2018 and the longer run. This implies that the Fed is able to see through the recent short-term high volatility in financial markets and global economic slowdown, and has confidence in a steadily growing economy in the U.S. this year.
  • The continuously improving labor market, as reflected in the low unemployment rate, may have served as an important reason for the Fed to believe in solid economic growth and possible higher inflation in the future. All this would call for a tightening monetary policy. The unemployment rate is projected to be 4.7 percent in 2016, 4.6 for 2017, and 4.5 for 2018.
  • As inflation is critical to the Fed’s policy, today’s projections reveal that the Fed has confidence in inflation moving toward its 2 percent target in the longer term. Core CPI, which measures the trend in consumer prices excluding the volatile food and energy costs, posted a solid increase in the last 12 months, at 2.3 percent, possibly indicating firming inflation. Even though the Fed lowered its outlook for future raises, a rate increase in June is still likely.
  • Four out of 17 FOMC participants assessed that four quarter-percentage-point rate increases in 2016 is appropriate, and three participants believed three increases is appropriate. Either way, raising rates in June is likely, given that there are only three big FOMC meetings (the meetings with a projections release and a news conference) scheduled after March for the rest of the year.

 

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