The Federal Reserve’s monetary policy setting committee, the Federal Open Market Committee (FOMC), concluded its June meeting and confirmed the generally held expectation of no increase in the federal funds rate at this meeting. While the June meeting was widely regarded as the likely timing of “lift-off” late last year and early this year, the consensus had shifted to later this year, with current expectations focused on the September meeting.
The formal statement following the meeting provided no surprises. The slowdown in first quarter GDP growth was characterized as transitory, below target inflation, the result of declining energy prices, which likely have stabilized, and labor market improvements as continuing. The statement repeated early themes of keeping the federal funds rate at its current level, cautious optimism about the pace of recovery, and future policy actions being data dependent.
At the press conference following the meeting Federal Reserve Chair Janet Yellen reiterated the main points of the formal statement and took questions. Yellen stressed two key points throughout: most FOMC members expect that economic conditions will improve enough in the near term for interest rates to begin rising this year rather than next; and, after the first increase the pace of increases would be gradual. Yellen also emphasized that the timing of lift-off had gain much attention but the pace of subsequent increases would be the more important factor influencing the recovery.
After re-emphasizing that the pace of interest rate increases would follow the pace of improvements and expected improvements in GDP growth, the labor market and inflation, and not the calendar, Yellen referred to the dot plot of FOMC members’ expectations of the level of the federal funds rate at the end of 2015, 2016, and 2017 (dot plot). While there is no preconceived schedule for rate increases, based on their individual forecasts of the recovery, only 2 of 17 FOMC members expect the federal funds rate to remain at its current level at the end of 2015. The median forecast for the midpoint of the appropriate range for the funds rate at the end of 2015 was 0.625% (between 0.50% and 0.75%), implying potentially two quarter point rate increases in 2015.
The median forecast for the funds rate at the end of 2016 was 1.625%, the median forecast for the end of 2017 was 2.875%. Yellen’s point was that there is no set schedule and the committee will not move in mechanical steps, for example, quarter point increases per meeting or every other meeting, but among the range of views held by FOMC members, the median is for sufficient improvement in the economy to justify a 100 basis point increase in the funds rate over the course of 2016, and 125 basis points in 2017. This connecting of the dots is the most specific guidance analysts will get as to the path of interest rates over the course of policy normalization in an uncertain economic recovery.