CNBC contributor Ron Insana predicts that the Federal Reserve's lower economic growth expectations may sidetrack the central bank’s plans for a fall rate hike.
Many experts think the central bank will raise its key short-term rate at some point this year. That rate has been held near zero since 2008. Many analysts predict that if the economy keeps improving, the Fed will raise rates in September.
“While the Federal Reserve upgraded its assessment of the economy in its latest statement, it did not give explicit guidance as to when it may move to normalize interest-rate policy. Policy makers characterized the economy as broadly improved but the Fed still noted that inflation and employment are not quite at its stated targets,” he wrote in a commentary for CNBC.
In a quarterly assessment of the economy, the Fed sharply lowered its estimate of growth this year, from a range of 2.3 percent to 2.7 percent estimated in March to just 1.8 percent to 2 percent. The downgrade reflects the economy's contraction in the January-March quarter, which resulted in part from a brutal winter.
The Fed also predicted that the unemployment rate would be 5.2 percent to 5.3 percent by year's end. Three months ago, it thought unemployment would drop to a range of 5 percent to 5.2 percent by the end of the year. The rate is now 5.5 percent.
New forecasts issued by the committee implied two quarter-point rate rises this year but a shallower pace of increases in 2016, Bloomberg reported.
Fed Chair Janet Yellen stressed that the date of the first rate increase is less important than the trajectory of subsequent ones. She said tightening would be “gradual,” and that the Fed wouldn’t follow a “mechanical” formula.
“Lower growth expectations in the future may not support more than a token hike by the Fed sometime in the fall,” he wrote.
“Still, it appears the market believes that rate hikes will begin in September, though, increasingly, the belief is growing that it's "one and done" for 2015. That is, the Fed will raise rates a quarter point in September and then wait until 2016 to try again, if the data warrant.”
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