6 Things You Need to Know About the Fed's Friday Speech
1. Rates Are Going Up This YearThere's no doubt about it, the prime rate is going up before the year is over. The Fed's economic forecasts don't leave any room for speculation, they will be raising interest rates by December. Many people think that September is the most likely time to see the first rate hike.
2. The Economy Is Still BrittleOne thing that Yellen made abundantly clear was that, while the economy is strengthening, it's still brittle.
3. Fed Wants Rates To Stay Low For NowAs of right now, the Fed has no problems with low interest rates. Inflation isn't a big concern right now for our economy -- especially compared with countries like China who are already taking emergency measures to fight it. The dollar is strong, and our economy is strengthening, but the Fed is happy to play the waiting game until the timing is perfect.
4. The Labor Market Is ImprovingLittle by little, the labor market is improving. Unemployment has been rocky and uneven, but in general the rates are falling and jobs are filling up. The quality of the labor market is another question altogether, since most jobs are being created in the service sector, where pay and benefits are poor.
5. Rate Hikes Are Coming A Little At A TimeWhen the Fed finally does decide to raise rates, it won't be a one-and-done. Rates will keep creeping up until the Fed is satisfied that it is taking an active role in fighting inflation. Even more importantly than that, they need to make some breathing room with interest rates. Right now they're at the very bottom, but the prime will rise a little at a time until the Fed feels like it has all of the tools it needs in its belt in order to manage the economy.
6. The Recovery Is Progressing SlowlyThe biggest takeaway from the chairwoman's speech is that the Fed clearly sees the recovery as taking longer than expected. The smart money on a rate hike before this speech was in June, but that no longer looks like it will happen. A recent downturn in consumer spending could be the culprit, especially as unemployment numbers have largely been in line with predictions.
If You're Thinking About Buying Bonds, Maybe You Should WaitA lot of people look toward buying bonds in the summer when the markets are sluggish and consumer spending is up. Even though the market promises to be slow this summer, it might be a better idea for rates to climb up before you make a multi-year commitment with your money. There's no doubt about it, rates are heading up this year, all you need to do is be patient.
By Aaron Phillips