4 Reasons the Fed Won’t Raise Interest Rates in June
It is no surprise that the Fed didn’t take action on interest rates at the April Federal Open Market Committee meeting. The question of interest to the market is whether the Federal Reserve has revealed some clear signal in its statement about the timing of the future rate increase. Even though the Fed did not change its forward guidance on rate increases from the March statement, we can discern what the Fed has on its plate. Four aspects of the economy stand out:
Related: Bernanke Was Right—Interest Rates Aren’t Going Anywhere
- The latest GDP data show worse-than-expected growth at an annualized 0.2 percent during the first quarter of 2015, compared to 2.2 percent in the last quarter of 2014.
- The strong U.S. dollar has continued to weigh on exports. Net exports in the first quarter stayed unchanged (0.0 percent growth) year-over-year, compared with 18.6 percent growth in the fourth quarter of 2014.
- Inflation has continued to stay way below the central bank’s 2 percent target. The price index for personal consumption expenditure (PCE), the measure of inflation preferred by the Fed, showed a 0.3 percent year-over-year increase in the first quarter, much lower than the growth rate of 1.1 percent in the fourth quarter of last year. Core PCE inflation, which excludes volatile prices of food and energy, reached 1.3 percent, compared with 1.4 percent in the last quarter.
- The improvements in the labor market, the other mandate of the Federal Reserve besides inflation, also slowed. Only 126,000 employees were added to nonfarm payrolls in March, compared to 264,000 in February and 201,000 in January.
Related: Fed’s Downgrade of Economic Outlooks Signals Later Rates Lift-Off
In all, the U.S. economy is growing more slowly than anticipated with some headwinds that may last for a while, such as the strong dollar. Both measures of the Fed’s dual mandate, price stability and maximum employment, remain below the Fed’s target. Normally this would call for an accommodative monetary policy, postponing the rate increases until later in the year. Rather than starting rate increases at the June FOMC meeting, the liftoff in September instead is more likely.
This story originally appeared at the American Institute for Economic Research.
It’s Official: No Government Shutdown – for Now
President Trump signed a short-term continuing resolution today to fund the federal government through Friday, December 22.
Bloomberg called the maneuver “a monumental piece of can kicking,” which is no doubt the case, but at least you’ll be able to visit your favorite national park over the weekend.
Here's to small victories!
Greenspan Has a Warning About the GOP Tax Plan
The Republican tax cuts won’t do much for economic growth, former Federal Reserve Chair Alan Greenspan told CNBC Wednesday, but they will damage the country’s fiscal situation while creating the threat of stagflation. "This is a terrible fiscal situation we've got ourselves into," Greenspan said. "The administration is doing tax cuts and a spending decrease, but he's doing them in the wrong order. What we need right now is to focus totally on reducing the debt."
The US Economy Hits a Sweet Spot
“The U.S. economy is running at its full potential for the first time in a decade, a new milestone for an expansion now in its ninth year,” The Wall Street Journal reports. But the milestone was reached, in part, because the Congressional Budget Office has, over the last 10 years, downgraded its estimate of the economy’s potential output. “Some economists think more slack remains in the job market than October’s 4.1% unemployment rate would suggest. Also, economic output is still well below its potential level based on estimates produced a decade ago by the CBO.”
The New York Times Drums Up Opposition to the Tax Bill
The New York Times editorial board took to Twitter Wednesday “to urge the Senate to reject a tax bill that hurts the middle class & the nation's fiscal health.”
Using the hashtag #thetaxbillshurts, the NYT Opinion account posted phone numbers for Sens. Susan Collins, Bob Corker, Jeff Flake, James Lankford, John McCain, Lisa Murkowski and Jerry Moran. It urged readers to call the senators and encourage them to oppose the bill.
In an editorial published Tuesday night, the Times wrote that “Republican senators have a choice. They can follow the will of their donors and vote to take money from the middle class and give it to the wealthiest people in the world. Or they can vote no, to protect the public and the financial health of the government.”
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Can Trump Succeed Where Mnuchin and Cohn Have Flopped?
President Trump met with members of the Senate Finance Committee Monday and is scheduled to attend Senate Republicans’ weekly policy lunch and make a personal push for the tax plan on Tuesday. Will he be a more effective salesman than surrogates in his administration?
Politico’s Annie Karni and Eliana Johnson report that both Democrats and Republicans say Mnuchin and chief economic adviser Gary Cohn have repeatedly botched their tax pitches, “in part due to their own backgrounds” as wealthy Goldman Sachs alums. “House Speaker Paul Ryan earlier this month asked the White House not to send Mnuchin to the Hill to talk with Republican lawmakers about the bill, according to two people familiar with the discussions — though Ryan has praised the Treasury secretary’s ability to improve the legislation itself,” Karni and Johnson write.