After staging a morning rally and an early afternoon pullback, the S&P 500 and Dow both bounced back this afternoon after the Federal Reserve released a statement from its June meeting. Of course, the Fed’s comments were just more of the same…
The Fed appears to be pleased with the recent economic data, signaling that the U.S. economy is rebounding from the disappointing first quarter. It stated that employment numbers have “picked up,” that housing numbers are showing “some improvement,” and housing spending is “moderate.”
As a result, many have latched onto these positive comments and are stating that an interest rate hike is likely this year, possibly as early as September. But what’s interesting is that the Fed didn’t explicitly say when it expects to increase key interest rates, as the timing of any hike remains dependent on the U.S. economy.
In fact, the Fed noted that it is still looking for more improvement in the labor market and inflation to move back towards its annual 2% target. Given the strong U.S. dollar, inflation isn’t likely to increase significantly any time soon, and the Fed is only projecting it to be about 1.3% to 1.4% by yearend. And while the unemployment numbers are improving, part-time workers are distorting the unemployment rate, making it look better than it actually is.
We must also consider Monday’s disappointing industrial production report, which showed a 0.2% decline in May. Manufacturing weighed heavily on production last month, as it accounts for more than half of industrial production and it slipped 0.2%. And while industrial production only accounts for about 12% of U.S. GDP growth, this report is significant and shows that the economy hasn’t bounced back as strongly in the second quarter as some had hoped.
So it’s not surprising that the Fed revised its 2015 economic growth projections for the U.S. in today’s meeting. In March, the Fed was expecting U.S. GDP growth between 2.3% and 2.7%. But now, it is only looking for growth between 1.8% and 2% this year.
Overall, the Fed did state that it still expects the federal funds rate to increase from 0.125% to 0.625% this year. But wage growth, inflation and economic data overall are still not supporting an interest rate increase, and, as a result, I still believe that key interest rates will remain near zero through yearend.