Liftoff will Begin Momentarily...Maybe

Jeffrey LackerBy:   Edward O’Gwynn

The much anticipated Federal Reserve federal funds liftoff campaign will have to wait another month or so to get started.  The Federal Reserve, which met on Wednesday, October 28, 2015, decided to hold the fed funds rate steady at near zero, again.  However, there was at least one dissenting vote which came from Richmond Fed President Jeffrey Lacker, who wanted to raise the Fed’s target rate by a quarter of a point.

December 2015 will mark seven straight years of the Federal Reserve’s fed funds target rate at near zero, presently at a range of 0.00% to 0.25%.   “When was the last fed funds increase,” you ask?  The answer is:  June 29, 2006.  On that day, the fed funds target rate was increased to 5.25% and it’s been all downhill since.

As we near the end of 2015, the chances for a Federal Reserve interest rate increase seems to rise or fall depending on which data point is introduced during the week.  Before Wednesday’s Federal Reserve meeting, the futures market put the probability of a rate increase at 40%.  After the meeting, chances for a December increase now stand at 50%. 

There seems to be a clear bias on the Federal Reserve Board to increase rates; just when and how much is where the decision making process becomes more difficult to gain consensus.  In her speech earlier in October, Cleveland Fed President Loretta Mester contended that zero interest rates are no longer appropriate and that “the economy can handle an increase in the fed funds rate.”  While that may be true if one looks solely at the US economy (near full employment and inflation is expected to return to 2%), it is not so for the rest of the global economy.  New York Fed President William Dudley made a more cautious assessment of the US economy in his speech in early October citing concerns about dollar appreciation, rising inventories and disappointing global demand. 

Will the clock start ticking soon, will it reset again, or is it already in count-down mode, depends upon who you ask.  One thing for sure is:  if a rate increase is “in the cards” for 2015, there’s only one more meeting left to do so.  It looks like we’ll have to wait until December to open this Christmas present.

Edward O’Gwynn, III is the SVP and Market President at BB& Mobile.


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