The first US interest rates rise since 2006 is now just a few months away, according to the US central bank. Federal Reserve chair Janet Yellen said in her semi-annual testimony to the US Congress that she expects rates to rise before the end of the year, and noted that if the Fed delayed for too much longer, it could have to raise rates sharply later on. That would rattle markets and indebted firms and households. The US economy has strengthened since a bad-weather-induced dip in the first quarter of 2015.
What the commentators said
Yellen sounded unusually keen to get on with tightening, noted Caroline Baum on marketwatch.com. Given that the economy is “chugging along” at an annual pace of around 2%, and inflation remains low, what’s the rush? Maybe Fed officials fear “being caught with their pants down” – if another crisis comes along, the Fed would have no scope to bolster the economy with rate cuts. So it wants “to put some space between [the] policy rate and zero”.
The latest data certainly suggest there is no need to wait. Many key indicators are in fine fettle, said Deutsche Bank – tax receipts point to solid income growth; vehicle sales are at a ten-year high of 17.1 million a year; and initial jobless claims (which track GDP closely) are down by a fifth on their first-quarter average.
Meanwhile, remember that the slump in oil prices undermined investment earlier this year, said Justin Lahart in The Wall Street Journal. The impact of this decline on GDP should now fade. Had it been absent, first-quarter growth would have been 0.4% rather than -0.2%.
Wage growth will be key to the timing of rate hikes, said Capital Economics. While the signals on that front have been mixed, there are signs it is poised to accelerate. More and more small companies say that finding qualified staff is their top problem, for instance. Wage growth looks set to rise to 3.5% next year. Expect the first hike in September.