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Tuesday, December 30, 2014

Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?

by Calculated Risk on 12/30/2014 02:47:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2015. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2014.

5) Monetary Policy: The Fed completed QE3 in 2014, and now the question is will the Fed raise rates in 2015? If so, when? And by how much? The Fed Funds rate has been at 0 to 0.25% since December 2008.

For years I've made fun of those predicting an imminent Fed Funds rate increase.  Based on high unemployment and low inflation, I argued it would be a "long time" before the first rate hike.   Well, time flies!

As far as the first rate increase and timing, Tim Duy wrote a week ago Looking Backward to See the Future

My baseline scenario is that the Fed drops "considerable" entirely in January, retains "patient" in March, drops "patient" in April, and raise rates in June.
Of course the Fed will be data dependent. If the unemployment rate declines to 5.5% or so in the May report, and core inflation continues to move upwards towards 2%, then a June rate hike seems likely.
Note: It seems very likely the FOMC will drop "patient" from the FOMC statement the meeting before hiking rates (if "patient" is in the April statement, a rate hike in June is much less likely).

If the data is less convincing, then the FOMC will probably wait until the July or September meetings (I've seen a few analysts arguing the FOMC will wait until 2016, but my feeling is the Fed will hike rates in 2015).

The FOMC will not want to immediately reverse course, so the might wait a little longer than expected.  Right now my guess is the first rate hike will happen at either the June, July or September meetings.  I expect subsequent rate hikes to be gradual, and depending on the timing of the first rate hike, I expect rates to be close to 1% at the end of 2015.

The old saying on Wall Street with regards to rate hikes is "3 steps and a stumble".  I don't think there is an validity to the saying, but I expect to hear it on CNBC in 2015!

Here are the ten questions for 2015 and a few predictions:
Question #2 for 2015: How many payroll jobs will be added in 2015?
Question #3 for 2015: What will the unemployment rate be in December 2015?
Question #4 for 2015: Will too much inflation be a concern in 2015?
Question #5 for 2015: Will the Fed raise rates in 2015? If so, when?
Question #6 for 2015: Will real wages increase in 2015?
Question #7 for 2015: What about oil prices in 2015?
Question #8 for 2015: How much will Residential Investment increase?
Question #9 for 2015: What will happen with house prices in 2015?
Question #10 for 2015: How much will housing inventory increase in 2015?