With the economy starting to make a recovery from the disaster of the housing market crash, many are wondering if interest rates are going to be rising soon. The economy has turned around, and more people are starting to take out more affordable loans. There have been ideas that the Federal Reserve raising interest rates at some point this year, but so far, they have yet to act. If interest rates are set to increase, it would come in September. There have been many factors in the Fed’s decision to raise their rates, and a weak job creation market in May has been a key factor. While it hasn’t occurred yet, it’s a possibility the interest rates will rise before the year is over.
Janet L. Yellen, the chairwoman of the Fed, stated wage growth has been positive, which will factor into the decision to raise interest rates. She spoke with the World Affairs Council of Philadelphia, and stated that, “the positive forces of employment growth and higher inflation are greater than the negative forces.” She is expecting more economic growth through the rest of the year, and expects the decision to favor the rise of interest rates. She also stated that labor market conditions and inflation will factor into the decision to raise interest rates.
The president of the Federal Reserve Bank of Cleveland is Loretta Mester and she has supported the idea that the interest rates will be raised. She is part of the majority that feels it’s time to increase the interest rates, while others say more data needs to be collected first. Lael Brainard, a Fed governor, stated there is an advantage to waiting for stronger data to be compiled and reviewed before the decision is made. She feels that if the Fed were to make the decision too quick, it would be worse than waiting too long. Her opinion is supported by another Fed governor, Daniel Tarullo, who wants to wait for a positive confirmation before moving forward.
Even though the economy was able to add 38,000 jobs in May, it fell below the market expectations, and the rate of new hires for the rest of the year. The market has shown some signs of weakness in March, countering the Fed’s prediction of quarterly rate increases. While it was considered to raise the rates in June and July, the months passed without a decision to raise the rates. Ms. Yellen has stated that there is no preset timetable on when a decision would be made, especially with market participants wanting to know when, and if, it’s going to happen.
In Yellen’s June speech, she cited economic uncertainties facing the Fed, including the Brexit situation and the inconsistencies of economic data. Now that Britain has decided to leave the European Union, the picture has grown murkier. Once there is more data regarding the British decision, Ms. Yellen said the breakup would have a negative effect on the Fed’s decision. Many people have been able to find steady work, whether through training programs, or new jobs being introduced into the market.
Ms. Yellen also stated in her June speech that unemployment was prevalent to minorities and lesser-educated people, leading the Fed to believe the labor market isn’t bouncing back as well as they had anticipated. There is hope as more people are starting to find jobs, and stick with them for a longer time. The feeling of hope isn’t felt as much elsewhere, with Narayana Kocherlakota, the former president of the Federal Reserve Bank of Minneapolis saying the Fed’s main job is to get everything back too normal on the balance sheet. Ms. Yellen responded to the critique by saying the Fed is “focused on its mandates of maximizing employment and stabilizing inflation. Raising rates was not an end, but a means.”
Ms. Yellen is hopeful the increase of incomes and employment will benefit the economy. It’s a scenario that does make sense, especially with the slowdown in employment in May, it should bounce back. Ms. Yellen did say that corporate investment slowdowns reflect the slowdown of job growth. It’s not a high possibility, but there is a chance corporate investments have contributed to the slowdown of hiring. If September comes along and the Fed doesn’t raise interest rates, it’s a possibility they may choose to wait until December. Considering it is an election year, the Fed may also choose to forgo raising interest rates. As of right now, they have until December to collect their data and determine whether or not to raise interest rates.