The Home Buyer's Korner

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July 31st, 2015

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Federal Open Market Committee Minutes for July 2015

Janet Yellen

The week we saw another Federal Open Market Committee meeting that came and went without a much-talk about an interest rate hike. However, the FOMC’s July meeting – a two-day event that wrapped up in Washington on Wednesday and was the fifth of the committee’s eight scheduled meetings this year – could be the group’s last uneventful gathering.

The stage has been set for an interest rate hike and many expect it to happen in the September meeting. If it does, it will be the first hike since 2006.

Since the Federal Open Market Committee meeting in June we’ve seen indicates that economic activity has been expanding moderately and the committee said in it statement released Wednesday, “The labor market continued to improve, with solid job gains and declining unemployment.”

The statement also noted “moderate” growth in consumer spending and improvement in the housing sector, though it emphasized that inflation continued to run below the Committee’s target rate of 2 percent.

The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, indicating that FOMC members think it remains appropriate to keep the country’s interest rates at their current near-zero levels, at least for the time being.

No one was expecting much out of this meeting, and that’s exactly what we got. Most economists view it premature to change policy based on the current economic data and markets conditions and believe when the Fed sits down in mid-September to look at new data, it will be an appropriate time to address any rate hikes.

Federal Reserve Chair Janet Yellen has stressed data dependence in assessing the country’s economic health, vowing only to move on rates when the full data picture supports it.

The Fed has said for awhile, they have no judgment about the appropriate date to raise the federal funds rate. Their judgment will depend on unfolding economic developments and how they affect their forecast.

It’s been a long time since the Fed raised rates. Doing so, in a deliberate and gradual way and looking at what the impact of those decisions are on the economy strikes Chairman Yellen as a prudent approach to take.

Living and dying by data can be easier said than done, considering the economy has been a mixed bag in recent months. The unemployment rate hit a seven-year low in June, but that was only because 640,000 people left the labor market.

Disposable personal income ticked up 0.5 percent in May for the second straight month of gains, but retail sales dipped 0.3 percent in June and were revised down to just 1 percent growth in May.

Sales of existing homes in June climbed for the ninth straight month, while median sale prices hit an all-time high. But new home sales dropped 6.8 percent month over month and revisions to May’s sales figures knocked off 29,000 previously reported transactions. The country’s overall home ownership rate in the second quarter clocked in at just 63.4 percent and was the lowest reading since the 1960s.

Housing growth remains far from robust and can be connected to declines in retail sales as consumers continue to struggle to afford purchases, particularly large-ticket items amid stagnant income growth.

Despite the recent data’s propensity for being all over the board, Fed officials indicated Wednesday that they see more good than bad when assessing the domestic economy from a bird’s eye view. The FOMC suggested that “with appropriate policy accommodation, economic activity will expand at a moderate pace.”

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent,” the committee’s statement said.

One of the Fed’s primary responsibilities is to oversee domestic price inflation, which has been largely sluggish in recent years. But consumer prices jumped 0.3 percent in June and have been positive for five consecutive months, and the selling prices received by producers for their goods and services in June climbed 0.4 percent month over month.

A rate hike would typically be used to help curb inflation, so signs that prices are picking up are likely to force the Fed’s hand sooner rather than later.

“If we wait longer, it certainly could mean that when we begin to raise rates, we might have to do so more rapidly,” Yellen said earlier this month, noting the Fed would have to make a more extreme initial adjustment if it waited until inflation was out of control. “An advantage to beginning a little bit earlier is we might have a more gradual path of rate increases.”

In other words, Yellen hopes to make the country’s interest rate hike a marathon, not a sprint. She has repeatedly noted that lifting rates will be a gradual process that will ideally involve multiple boosts of only a fraction of a percent, rather than a more jarring adjustment all at once.

“The importance of the initial step to raise the federal funds rate target should not be overemphasized,” Yellen said in prepared remarks before the House Financial Services Committee. “What matters for financial conditions and the broader economy is the entire expected path of interest rates, not any particular move, including the initial increase, in the federal funds rate.”

Yellen also said earlier this month that the FOMC’s July meeting wasn’t technically off the table for a rate hike, but that the committee “would likely have a press briefing afterwards” if it was to make a move.

She could conceivably schedule a briefing after any of the FOMC’s remaining three meetings this year. But since the September and December sessions, both already have prescheduled press conferences; most economists speculate that rates will be boosted following at least one of those meetings.

The economy would not need to disappoint by much for a dovish Fed to push the rate increase back until December In any case, the Fed will want to increase the policy rate at least once this year for three reasons: to show markets that it takes the threat of inflation seriously, to signal that the period of loose liquidity and cheap money is coming to an end, and to test the market response to the first rate rise in nine years.

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