Interest Rates to Rise in the Summer? A Definite Maybe.
- Jan 29, 2015
The central bank speaks: “Economic activity has been expanding at a solid pace.” That’s the strongest language the Federal Open Market Committee has used to describe the U.S. economy in quite a while, appearing in the latest statement from the committee, which was released on Wednesday. For one thing, the Fed doesn’t like strong language–or colorful or interesting or even particularly descriptive language, and it goes out of its way to be as staid as central bankers probably should be. On the other hand, the economy hasn’t been this strong in years, so the language this time seems to fit.
Or, as the FOMC puts it: “Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow.”
So does all that mean an interest rate increase is in the cards for ’15? The Fed is its usual reticent self on that matter, which is of a lot of concern to anyone who borrows or lends money (pretty much the entire real estate industry): “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” That’s the verbiage that the central bankers started using recently to be vague about their intentions, though it was generally taken to mean that the Fed would probably raise rates sometime this year. Investors, at least, are persuaded of that eventuality, with the 10-year Treasury yield dropping all the way to 1.75 percent following the FOMC statement.
One aspect of the “diminishing underutilization of labor” is unemployment as measured state-by-state. In a separate report this week, the Bureau of Labor Statistics noted that 46 states and DC enjoyed unemployment rate decreases from a year earlier, only two states suffered increases, and two states had no change. The national jobless rate, at 5.6 percent, is 1.1 percentage points lower than in December 2013. But are some energy-oriented local and regional economies going to see rising unemployment because of the halving of the price of oil? So far, no. Mississippi, which isn’t known for its energy business, had the highest unemployment rate among the states in December, 7.2 percent, with DC at 7.3 percent. North Dakota again had the lowest jobless rate (for now), coming in at 2.8 percent.