Global uncertainty, low inflation not enough to delay liftoff decision, say BBVA Compass economists
December 21, 2015: The US Federal Reserve’s decision to raise interest rates was based on an assessment by Fed policymakers that the US economy was headed in the right direction and ripe to handle the long road to monetary normalisation, BBVA Compass economists say in their latest report.
“Federal Open Market Committee members unanimously agreed that this was an appropriate time to raise the federal funds rate,” writes BBVA Compass Senior Economist Kim Chase. “The Fed has overcome a huge obstacle with this first rate hike, but now they need to deal with the reaction and hope that the economy continues to move along in line with their outlook.”
The report notes that positive economic indicators — among them an improved labour market, with a 5 percent unemployment rate and pickup in wage growth — overrode concerns about global volatility and low inflation, leading all Federal Open Market Committee members to vote in favour of a liftoff.
US Federal Reserve Chair Janet Yellen was quick to emphasise any future hikes would be gradual as policymakers allow short-term volatility to settle and are able to assess the actual impact of the first rate hike. To have a better idea of what exactly FOMC members will be looking out for, a review of the minutes from Wednesday’s meeting will be necessary, Chase writes. The minutes are expected to be released in early January, 2016.
“As long as their outlook remains intact, the Fed can continue along with their data-dependent strategy and take additional, albeit gradual steps toward future interest rate hikes, with only two more rate increases to close out 2016 at 1.0%,” said Chase.