Economy flashing signs the Fed needs to hike rates: Sonders
The final two-day meeting of the Federal Open Market Committee for 2014 is underway.
The big question is whether or not the Federal Reserve will remove the “considerable time” language from its statement which will be released Wednesday. According to a Bloomberg News survey, 68% of 56 economists say the Fed will drop the language from their statement and replace it with a different term.
In the attached video, Charles Schwab Chief Investment Strategist Liz Ann Sonders tells Yahoo Finance Editor-in-Chief Aaron Task that, despite tumbling oil prices and recent stock market turbulence, the Fed will still likely remove the language from their statement. “Maybe the chances have dropped a little bit because of some of the turmoil happening globally, but I think it is their bias to do it,” she says.
Sonders also believes because the Fed has a press conference scheduled following the meeting’s conclusion, it makes sense to do it now. “If [Fed Chair Janet] Yellen had her druthers,” says Sonders, “she would drop [the language] during a meeting where she has a press conference…just to have an opportunity to explain it.”
Despite the free fall in oil prices and the resulting market slide, the Fed has pretty solid economic evidence that the economy is back on its feet. The job market has rebounded with force in 2014, on pace to see the greatest job growth since 1999. But, at the same time, the Fed has missed its inflation targets repeatedly.
This puts the central bank in a tough spot, says Sonders. “Even without the decline in oil prices, inflation was comfortably below their target, but they have the employment mandate. And most of the indicators there are flashing a sign to them that they need to move.”
With inflation and employment benchmarks guiding the Fed decision it is "a little bit of a conundrum" for the Fed. "The U.S. central bank is unique in that it’s got this dual mandate," says Sonders. "One side of the mandate is telling them to go and one side of the mandate is telling them ‘hey, you can be patient.’ It will be interesting to see what they pay more attention to.”
Sonders thinks the Fed should raise rates and will do so around mid-year, perhaps at the June FOMC meeting which also has a press conference scheduled after the meeting wraps up. That would give Yellen another opportunity to explain the Fed’s decision-making.
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In a 0% interest rate policy environment, the Federal Reserve doesn’t have too may tricks up its sleeve should another crisis arise, except more Quantitative Easing. That's why economists and strategists are hoping for the reassurance of a rate hike next year. “We are past the point where the Fed should be treating the economic patient like it’s in the trauma room,” says Sonders. “I think the market wants that too.”
But if turmoil continues in the stock market in 2015, could the Fed delay a rate hike? “I don’t think volatility in the stock market will necessarily prevent them from doing it,” says Sonders. “I think it would actually have to be the economic data that would suggest that they move later.”
The Fed will release its statement at 2 p.m. Wednesday. It will also release forecasts for the benchmark federal funds rate, unemployment, inflation and growth. Janet Yellen will hold a press conference at 2:30 p.m.
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