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Fed sets the stage for rate hike

| MoneyRates.com Senior Financial Analyst, CFA
min read

Despite rumors that this week's Fed meeting would be the meeting -- the one at which it finally decides to raise interest rates -- it now appears that the Fed meeting everyone has been waiting for could happen anytime on this year's Federal Open Market Committee schedule.

In other words, while the Fed remained true to their word and did not raise rates at the end of this week's meeting, they have made it clear that they expect to do so fairly soon -- perhaps as soon as their June 16-17 meeting.

Why the Fed is waiting -- for now

It has long seemed that the Fed would like to raise interest rates, but keeps encountering a series of obstacles. For years following the Great Recession, unemployment remained high and job growth was too sporadic to risk raising rates. Then, when job growth stabilized and unemployment declined last year, a sudden bout of deflation scared the Fed off from raising rates.

In recent months, just as prices appear to be recovering, job growth has once again faltered. Also, the initial estimate of first-quarter real GDP growth came in at an annual rate of 0.2 percent, suggesting that the economy more or less ground to a halt in the first quarter.

The expectations game

Despite these setbacks, the Fed's latest statement seems pretty optimistic. It notes that weakness in prices was largely a temporary result of falling energy prices, and that rising real incomes and strong consumer sentiment set the stage for stronger growth in the months ahead.

This optimism is especially significant because the Fed has made it clear in recent statements that inflation and employment may not have to actually reach its goals before it raises rates, but merely show progress toward those goals.

Notably, while the Fed's previous meeting notes specifically mentioned that it did not anticipate a rate hike at the April meeting, today's notes contain no such assurance about the June meeting.

The reason for all this hinting and emphasis on anticipation is to cushion the impact of a rate hike by giving the investment community plenty of time to get used to the idea. The stock and bond markets are both at elevated levels that depend at least in part on low interest rates. Investors may have to learn to live with higher rates, but the last thing the Fed wants to do is trigger a damaging market shock.

In contrast, one group that is eager for higher rates are depositors in U.S. banks. The most recent MoneyRates survey of bank rates found that most banks seem content to sit back and wait for a change in Fed policy before raising savings and money market account rates.

However, a handful of banks with the highest savings account rates seem intent on getting out ahead of the Fed, and have already started to raise their rates. Their version of playing the expectations game is to anticipate that Fed policy will change, and by mid-June they may be proven correct.

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