Fed members unclear on pace of rate hikes

By Hazel Bradford, Crain News Service

WASHINGTON (Jan. 7, 2016) — While all members of the Federal Open Market Committee (FOMC) agreed Dec. 16 to raise the federal funds rate by 25 basis points, the path going forward is less clear, according to minutes of the meeting, which were released Jan. 6.

For some members, the rate hike was “a close call,” and they emphasized the need to avoid appearing to commit to any specific pace of adjustments. The median projection among FOMC members of a rate of 1.4 percent by the end of 2016 stayed the same. However, the median for later years declined slightly from previous meetings, to 2.4 percent by the end of 2017, and 3.3 percent at the end of 2018, over expectations of persistent economic headwinds and a gradual rise in inflation.

“Participants cited a number of lingering concerns, including the possibility that further dollar appreciation and persistent weakness in commodity prices could increase the stress on emerging market economies and that China could find it difficult to navigate the cyclical and structural changes underway in its economy. Several upside risks to the U.S. outlook also were noted, including the possibility that declining energy prices could spur consumer spending more than currently anticipated,” the FOMC minutes said.

Robert Tipp, managing director and chief investment strategist at Prudential Fixed Income, said, “They have a whole list of things that they need to make sure that nothing goes off the rails for them to be able to continue raising rates.”

Roger Bayston, director and senior vice president of Franklin Templeton (BEN) Investments (BEN)' fixed-income group, said: “There's no doubt that as we come into 2016 we are going to be balancing the continued tighter labor market and other factors, balanced with the strong dollar, declining prices for energy and other commodities. I think that's the dynamic the market is going to continue to wrestle with in 2016.”

FOMC members expect that the appropriate target rate level could change as many as four times this year, but the market is likely to expect half that many, Mr. Tipp said. “That's how it worked out last year. Their bark has been much worse than their bite.”

This report appeared on the website of Crain's Pensions & Investments magazine, a Chicago-based sister publication of Tire Business.