Yellen ain’t yellin’

Recent Fed news indicates that Federal Reserve Chair Janet Yellen, in her speech at a conference of bankers and financial leaders at the Federal Reserve Bank of St. Louis, Missouri, is not likely to raise interest rates by year’s end as anticipated. Although Fed Chair Yellen expected to raise rates, don’t look for those rate hikes before next year. Record lows remain where they have been since 2008.

What’s up with that?

China leads a global economic slowdown, the consequences of which are wide-ranging:

• U.S. job growth has stalled.
• Wages and inflation are subpar.
• Consumer spending is sluggish.
• Home sales have flattened.
• Investors are nervous.
• The stronger dollar is hurting manufacturing by making U.S. goods more expensive overseas.

According to Diane Swonk, chief economist at Mesirow Financial in Chicago, the “data has gotten weaker” and the “Fed is farther away from achieving its target on inflation.” (kgeraghty, Community Contributor, 2013)

Is a rate hike still possible? Of course! Data shifts constantly within the political and economic climates. However, that prospect has been called into question by two key Fed officials. For months, the news has been that the economy is improving on a consistent projector despite a global slowdown and would no longer need the bolster of uber-low rates. Recall the Fed’s rate was cut to near zero during The Great Recession to encourage borrowing and spending. Since then, hiring has risen sharply, consumers spending and housing markets steadily recovered.

Enter 2015 with a likely mid-year rate hike – the first in a decade. A harsh winter slowed growth, so the likelihood of a rate hike moved to September. China then springs a “gotcha” moment with a devaluation of its currency that shook markets and raised fears that the 2nd largest economy in the world was weaker than everyone thought. Growth in the U.S. could be derailed, so no rate hike in September.

We are now in closing October, and the outlook has dimmed further as hiring slows, retail sales flatten, and the housing recovery is on life supports. Although inflation may be its biggest obstacle, the Fed boasts of an achievement of a mandate to maximize unemployment. The price stabilization mandate is a far cry away from being on target. Cheaper energy and a stronger dollar depresses import prices, signaling economic weakness.

Will there be a rate hike before the end of 2015? Not likely. All indications say no, but the discussion continues amidst threats of a government shutdown, policy changes, and global market fluctuations.

As in previous years, all we can do is watch, wait, and react!

BREAKING NEWS: Speaking of react, stocks faltered with today’s announcement that the Fed will not raise interest rates: see this news from USA Today. However, it appears that a possible rate hike still looms for December.