Although the US economy is looking strong, a number of trends could threaten to weaken growth as the year goes on. As a result, the Federal Reserve may not be in a position to increase rates until March of 2016.
According to Ellen Zentner, Morgan Stanley economist, in reviewing the current outlook, the probability of the Federal Reserve increasing rates sometime mid-year 2015 is decreasing. In addition, the longstanding expectations that the first rate increase will occur after January 2016 is becoming more of a possibility. However, the majority of economists disagree, believing that rates will actually increase as early of June this year.
In the near future, growth will get a boost from lower energy costs. However, growth for gross domestic product is expected to slow over time as the positive impact is absorbed, production slows, and investments take hold. Zentner also stated that stronger than anticipated will be downward pressure on inflation.
Economists believe the personal consumption expenditure will drop to 1.1% year-over-year by October of this year. Then after rates start increasing by the Fed, it will continue to drop at every meeting.
The forecast for March 2016 is that inflation, both core and headline, with wage growth getting stronger and the rate of unemployment continuing to improve, will give the Federal Reserve justification for eliminating policy accommodation at a good and steady pace.
From the Federal Open Market Committee (FOMC) policy meeting, there is no signal that major policy change will occur. However, clues pertaining to the central bank’s timing of a rate increase since 2006 will be closely monitored. Since 2008, the Fed has maintained primary the federal funds rate between 0% and 0.25% in an effort to provide the economic recovery support.
The huge asset purchase program offered by the Fed ended in October, which for many experts, indicated that interest rates would go up this year. Now, when rates will actually increase remains a question. Again, most economists feel a hike will take place in June but others believe rates will not go up until January, or even as late as March of next year.