Is a September lift-off for US interest rates still likely?

30th July 2015


Following the latest rhetoric from the US Federal Reserve some economists are split on whether September will mark the point at which US interest rates move up.

In its latest statement, the Federal Open Market Committee (FOMC), which is responsible for setting interest rates in the US, did not provide any clear hints that a September rate hike is coming.

However Steve Murphy US economist at Capital Economics said this does not mean that it will not happen, “especially since the statement sounded a bit more upbeat on the economy”.

He said: “The policy statement was largely unchanged, with only some minor tweaks to acknowledge the improvement in the economic data. The housing sector is described as showing ‘additional’ rather than ‘some’ improvement, jobs gains are now thought to be ‘solid’ and the unemployment rate is ‘declining’ rather than having ‘remained steady’ as before.”

But while these tweaks fell short of a clear hint that a rate hike is coming at the next meeting in September, Fed chair Janet Yellen has gone on the record to say that the first rate hike is likely to come this year.

The latest minutes also showed that 15 of 17 officials expected rates to rise this year and 10 of 17 anticipated two 25 basis-point increases.

Murphy added: “This suggests there’s a good change that rates will rise at two of the three meetings left this year, with September still very much in play. By that point, concerns about Greece will probably have receded further and concerns about core inflation overheating could have grown.

“Our view is that the Fed will raise rates at the September and December FOMC meetings, taking the fed funds target range to between 0.50% and 0.75% at year-end. Perhaps more importantly, thereafter we see stronger wage growth and core inflation resulting in a much more aggressive pace of tightening than is currently anticipated by the markets and Fed officials, leaving the fed funds rate at 2.25% to 2.50% by end-2016.”

However Anna Stupnytska, global economist at Fidelity Worldwide Investment feels December remains a more realistic option for a rate lift-off‏.

She said: “The July FOMC’s statement contained minimal changes and overall did not provide any further clues as to the timing of the first interest rate hike. Clearly, as the Fed remains in the data dependent mode, all options are still on the table and a September move is still in play.”

Stupnytska asserted that the focus is now squarely on the data over the next few weeks. “Among the main indicators to watch in the run-up to the September meeting are the Q2 Employment Cost Index, US core PCE, as well as the upcoming labour market reports for July and August. Visible strength in all of these, combined with decent pace of business activity and consumer spending, could be enough to warrant the first hike in September, provided global risks from China and Greece remain contained.”

However, given some slack left in the labour market and the continued downtrend in commodities, inflation and wages are unlikely to start showing a meaningful turnaround before year-end she added.  Stupnytska said: “With the strength of the US dollar and little external demand still providing an additional moderate drag for growth, the Fed should be able to wait for a bit longer. In my view, December remains a more realistic option for the lift-off.”

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