Janet Yellen and the Federal Open Market Committee concluded their July meeting on Wednesday, July 29. In the FOMC’s statement following the meeting the FOMC reported it would again keep the federal funds rate unchanged. The meeting’s statement and previous media discussions by Federal Reserve officials point to a rate hike before the end of the year which now leaves only the September, October and December meetings.
The July meeting statement follows suit with the FOMC’s overall sentiment. The FOMC’s dual mandate of maximum employment and price stability continues to be its main focus. While price stability has been questionable, the improvements that have occurred in the labor market appear to be strong enough to warrant a rate increase within the current environment overall. In the FOMC’s July statement it made some subtle changes to the statement language signifying that the improvements occurring in the labor market could be enough to spur a rate increase despite a continued drag on prices.
As illustrated in the chart below the unemployment rate has significantly improved. At its current rate of 5.3% it is down from its peak of 10% in October of 2009.
Price stability however has been slightly bogged down by global economic factors. Effects from the stronger dollar, ongoing issues in China and lower global oil prices have all kept the price index for personal consumption expenditures down in recent months. As illustrated below the PCE Price Index is at 0.2% for the twelve-month period through May 2015 and the PCE Price Index excluding food and energy for the same time period is at 1.2%.
Overall it is likely that the improvements in the labor market could overshadow the low level of inflation leading to a federal funds rate increase as soon as September. Projections from the FOMC call for an increase to as high as 2.75% to 3% by 2016 which would return rates to first quarter 2008 levels. Projections also indicate rates stabilizing around 4% over the longer term.
In the day following the release of the FOMC’s statement U.S. market indexes closed higher. The S&P 500 was up 0.72% led by the energy sector up 1.36%. The Dow Jones Industrial Average was up 0.68% led by Microsoft (MSFT, Financial) up 2.10%. In the weeks ahead the Bureau of Labor Statistics’ employment data and specifically its Employment Situation report will be highly significant as the FOMC determines its timing for an interest rate increase.
