Fed Officials Are Confident They Can Raise Rates

A rate increase is expected as early as September if the current economic data continues to hold true.    

The Message

An interest rate- growth is being looked at by Federal Reserve officials in a more positive light. 

It is being said that this can occur as soon as September. 

The financial markets are finally beginning to stabilize after the United Kingdom’s vote to exit from the European Union, and signs are pointing toward the economy finally starting to pick up.

The following shows the results of the June 23 Referendum:

The policymakers at the central bank are almost one hundred percent confident that rates are going to remain unchanged when they meet from July 26 to July 27. 

This conclusion is drawn from the public comments officials have made and from the interviews that have been conducted with these officials.

However, the message in the post-meeting policy statement has the possibility of saying that the economy is doing much better than was predicted when officials last came together in June. 

This could set the stage for raising interest rates if data for the economy continues to hold up over the next couple of months.

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What are The Chances

This type of message would catch the future markets’ attention. 

The future markets say that there is little chance that the Fed is going to make a move by September.

At the beginning of June, traders on the Chicago Mercantile Exchange stated that there was a greater than 60% chance the bank would raise short-term rates as soon as September, by one-quarter of the percentage point, at least.

However, after weak May jobs reports and the results of the United Kingdom referendum on June 23, those numbers dropped. 

The following shows where these percentages stood on Monday and Tuesday of this week:

July Move?

After the June 23 referendum had taken place, the stock markets began to fall. 

However, after the initial shock took place, the stock markets started to come back around.  U.S. indexes even hit record highs, and the value of the dollar stabilized.

The jobs report in June was also much better than initially expected. 

Because the economy seems to be doing better, raising rates by September appears to be back on the table for the Fed. 

However, many officials are saying that they have the ability to wait and be patient before they raise rates yet again.

These statements lead to the belief that a move in July is unlikely to happen.

The following could increase the urgency that officials feel at their upcoming meeting, or otherwise, increase the likelihood of a rate change:

• New Data
• Data that supports hiring
• Data that supports growth-inflation
• Improved jobs market
• Improved economy outlook

However, new rounds of data supporting the economy, particularly data supporting hiring or promoting a growth in inflation, could increase the urgency officials feel at their meeting next week to raise the rates.

Dennis Lockhart is the Atlanta President for the Fed. 

He is a centrist for the central bank, and his views are usually in line with the middle ground of the views held by most other officials. 

Last week, Lockhart told reporters that the likelihood of raised rates by the Fed remains high, and he even added that he wouldn’t rule out the possibility of two increases occurring before the year is up.

The Market

The markets have remained stable since the main shock of the Brexit vote has passed, according to Lockhart. 

He also says that the turmoil that led up to and followed the election does not appear to have caused any direct harm to the United States’ economy.

Robert Kaplan is the Dallas Fed Reserve Bank President. 

Last week in an interview that took place at the Official Monetary and Financial Institutions Forum, Kaplan said that we should be looking at accommodation removal.

Last December, the Fed raised its federal fund's rate to a .25%-.5% rate. 

This price has managed to hold steady since it changed last December. 

This is in spite of warnings saying that the action would cause rates to be raised yet again.

Officials are going to be reluctant to signal when a next rate increase can be expected when they release their policy statement this week. 

There is still uncertainty about the economic outlook, and this change is staring them in the face. 

The following shows the rates as they stood after the June Meeting:

Eight weeks will pass between the upcoming July meeting and the one scheduled to take place between September 20 and 21st. 

During this time, two more job reports and a lot of other relevant data will come to light.

What Do Officials Say?

Fed officials tried to sway market expectations toward a rate move earlier in the year. 

However, they were left with embarrassing results. 

Minutes of their April policy meeting combined with comments made by officials back in April and May suggested that the track was set for the rate to move in either June or July of this year.

The Fed was held off and expectations decreased for a July rate increase to take place due to:

• The jobs reported in May were weak
• The United Kingdom decided to leave the European Union
• The shock of the vote above showing signs of impacting the economy

It is expected that officials could have a better outlook on the economy when they meet next week. 

It is also anticipated that they may keep their options on rates open.

When officials met in June, it was said that the labor market improvement was seeing a slow pace and job gains had all but disappeared. 

However, since this meeting took place, the Labor Department reported that over 287,000 jobs were added by employers in June. 

Improving their outlook on the job market is one way to signal optimism.

Loretta Mester is the Cleveland Fed president. 

In an interview with the Wall Street Journal that took place recently, she stated that basically, we were at capacity in the ways of employment.  

She further added that she thought the underlying fundamental for the U.S. economy was solid.

What’s to be Expected?

Over the next few months, jobs are going to be the Fed’s wild card. 

The following shows a comparison of the April-June payroll growth compared with the first quarter and the amount in 2015:

If salaries stay on this track, officials might decide to delay the rate move until the end of this year or even into next year. 

However, if payroll gains shift back to the 200,000 mark, it increases the likelihood of a move in September.

Divisions could be faced by Janet Yellen, Fed Chairwoman, as one decision on how to approach rates. 

However, Ms. Mester and other officials have expressed their support to a price increase. 

Others have urged for caution to be used as the Fed Chief moves forward.

Daniel Tarullo, Fed Governor, held an interview with the Wall Street Journal in early July. 

He stated that the economy is not currently hot. 

Tarullo stated that he thought the best course of action was to wait for better evidence that inflation would move toward and stay at the 2% mark before rates were raised again.