I do not anticipate that the Fed will increase interest rates at the upcoming September meeting. My expectation would be possibly the Fed December meeting for an interest rate increase. Based on previous Fed action, the amount of increase would be expected to be 25 basis points.
The Fed is building the market expectation that rates could be raised in September if jobs data remains strong, which could move inflation towards the 2% goal and set up a rate increase this year. Fed chairwoman Janet Yellen’s remark that inflation could reach the 2% goal “over the next couple of years” set the tone for an upcoming interest rate increase.
However, I am surprised that the Fed would shift away from the importance of inflation, a previously necessary element for an increase in interest rates. The comment that the 2% inflation could occur over the next couple of years implies that there may be a new normal regarding the economy and inflation growth expectations.
The Fed has also said interest rates could remain at a low level if economic productivity grows slowly and a high rate of saving would continue. The premise is, with increased spending, productivity will grow and consumers spending more will lead to a stronger economic expansion which would allow the Fed to eventually raise interest rates. Consumer confidence is important to stimulate consumer spending which makes up 70% of the U.S. GDP. So far, the consumer confidence to spend enough to stimulate growth and moved to market to a 2% inflation rate has failed to materialize. It is hard to imagine that labor, economic growth and inflation will have any dramatic changes prior to the September meeting.
Daniel Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains.