One of the biggest conversations in the finance and investing space over the past year has been the Federal Reserve interest rate; and for good reason. The Federal Reserve has held interest rates at an all-time low for several years in an attempt to fuel economic momentum in the United States. However, after years of growth, the Fed has openly stated that they do plan to increase interest rates by the end of the year. Nonetheless, I’m not so sure a rate hike is as likely as one may assume. Today, we’ll talk about recent comments from Janet Yellen in regards to the Fed’s interest rate, other factors that are likely to delay a rate hike, and how these factors are likely to stop a rate hike. So, let’s get right to it…
Janet Yellen Sends Mixed Signals Over Interest Rate Hikes
For the past two days, Janet Yellen has been discussing interest rate hikes with lawmakers; and how an interest rate hike would affect the United States economy. In the second day of congressional testimony, Yellen made it clear that the Federal Reserve still intends to increase interest rates by the end of the year. However, she also offered the following statement…
“We don’t want to cut off job growth and income growth, and we do want to see inflation move up to 2 percent… We would not be pleased to see it linger indefinitely below 2 percent.”
She also explained that the Federal reserve wants to see further improvement in the labor market and have great confidence that inflation is moving back toward its 2 percent target before it starts to reserve interest rates.
However, these statements don’t correlate well with the Fed’s plans to increase interest rates before the end of the year. The reality is that if Yellen really believes that job growth is going to continue and inflation will continue to grow…well, she may be living in a fantasy world in which all external factors aren’t likely to be taken into account.
Factors That Tell Us A Rate Hike Isn’t Likely
In order for the Federal reserve to be comfortable in raising interest rates this year, by Yellen’s own words, they will have to see more growth in the labor department in and the area of inflation. However, factors around the world will probably hamper these stats.
Oil Prices & Iran – A key factor in this equation is the nuclear deal with Iran and how it’s likely to affect the value of oil. It’s important to remember that the energy sector plays a major role in the growth of the United States economy. However, when oil prices are low, the energy sector feels the pain. Keeping that in mind, the new nuclear deal between the United States and Iran brings more supply to the already oversupplied oil market; which is likely to drive the price of oil down further throughout the rest of the year. This is likely to have a negative affect on growth in the United States.
Economic Conditions Around The World – I recently came across an interesting article right here on CNA Finance that explained that the world is going through a bankruptcy of sorts. As a matter of fact, the article pointed out that 24 nations around the world are facing a “full-blown debt crisis”. Considering that economies are intricately connected from nation to nation; worldwide conditions are likely to hamper growth right here in the United States.
Consumer Spending – In order for higher inflation numbers to be reached, consumer spending growth is going to be a key figure. While that figure was positive in May, spending seems to have stalled in June; leading to even further concerns of economic uncertainty in the United States.
When we look at all of these issues, it’s clear to see that the economic position of the United States isn’t likely to turn overwhelmingly positive by the end of the year. Therefore, a rate hike simply wouldn’t make sense; even by the Federal Reserve’s own statements.
What Do You think?
Do you think an interest rate hike will happen by the end of the year? Why or why not? Let us know in the comments below!