The If and the When of a Federal Reserve Interest Rate Hike
A great deal of speculation in both the media and the financial industry generally has centered on if and when the Federal Reserve Bank will raise interest rates. Speculation about this issue intensified after a meeting of the Federal Open Market Committee in mid-December 2014. The Federal Open Market Committee is involved in the process of determining Federal Reserve Bank interest rates.
Statement of Fed Chair Janet Yellen on Interest Rate Hike
Following the Federal Open Market Committee meeting, Fed Chair Janet Yellen was compelled to issue a statement addressing speculation regarding when (or even if) interest rates would rise. In her statement, the Fed Chair refused to provide a date certain when interest rates would rise.
The closest the Fed Chair came to making a prediction about when interest rates would climb over the nearly zero percent mark was to note that the issue would be revisited after “a couple” Federal Reserve Board meetings in 2015. When pressed for a more definitive estimate of when interest rates might increase, Yellen clarified only that the issue would be revisited after a couple Board meetings in 2015 and that “couple” means “two.”
When Interest Rates Might Increase
On news of the delay in any potential increase in Fed interest rates, the stock market rallied. Indeed, the New York Stock Exchange rallied to record levels. Thus, in the final analysis, the decision to notch up Fed interest rates will be guided by the overall health of the U.S. economy. The state of the stock market as well as the real estate market represent two of the indicators that are used by the Fed in evaluating the needs for maintaining a virtually zeroed out interest rate.
If the current economic trajectory continues through the first quarter of 2015, at least a minimal increase in Federal Reserve interest rates might be expected in the second quarter of the year. With that said, the economy remains at least somewhat unsteady and no one, including the Fed Chair, is making any hard and fast prediction regarding when (or even if) Fed interest rates will increase during 2015.
Changes Associated with Interest Rates to Date
The Federal Reserve slashed interest rates to virtually zero percent at the peak of the “Great Recession,” in December 2008. Despite some discussion to increase interest rates since that point in time, the Fed has not raised them in an effort to stimulate the economy and aid in recovery from the Great Recession that commenced in 2008.
In addition to chopping interest rates to virtually nothing, the Fed also started what is called the quantitative easing program, or QE. In fact, the Fed ultimately embarked on three quantitative easing programs, aptly named QE I, QE II and QE III. The Fed brought quantitative easing to an end in October, 2008. The Federal Reserve Board concluded that the economy has stabilized to the point that this added infusion of money was no longer necessary. However, the decision was also made to keep interest rates essentially zeroed out into the foreseeable future.
Quantitative easing involves the Federal Reserve purchasing bonds as a means of pumping more money into the economy. Through all three quantitative easing programs, the Fed pumped approximately $4.5 trillion into the U.S. economy. Economists generally credit the slashing of Federal Reserve interest rates and the central bank’s QE programs as the primary reasons why the U.S. economy has rebounded to the extent that it has thus far.
