Federal Reserve System: Fed Unlikely To Hike Interest Rates Until September 2015 FOMC Meeting

The U.S. Federal Reserve may wait until September to change monetary policy after the latest minutes from the central bank showed policymakers are in a no rush to raise interest rates. Previously, most economists expected to see a rate hike in mid-2015, but recent weaker-than-expected inflation data suggests an increase in rates could be pushed back a few months.

The latest minutes from the Fed show policymakers discussing whether tightening monetary policy too soon could damage the U.S. economy and dampen the prospects for maximum employment and the targeted 2 percent inflation. But the minutes suggest the Federal Open Market Committee still expects to raise rates in 2015, as most economists had expected.

September is becoming a more likely time for rate hikes instead of June. Economists are expecting weak inflation readings later this year from the Personal Consumption Expenditures Index and the Consumer Price Index. The two indexes are forecast to flirt with zero this summer and could even post negative readings in the middle of the year due to the dramatic drop in energy prices since last June. If so, it would likely delay a rate hike until the fall.

“If you have an economy that’s gradually accelerating and inflation that’s picking up in the second half of the year, then you would expect a rate hike around September,” said Gregory Daco, chief U.S. economist at Oxford Economics.

Data released Wednesday showed U.S. producer prices posted record drops in January, a sign that the fall in energy prices is keeping business inflation under control. The Producer Price Index, which measures prices paid to companies for their goods and services, fell 0.8 percent in January after falling 0.2 percent in December, the Labor Department said Wednesday. It was the biggest decline since November 2009.

The drop gives Federal Reserve officials room to pause as they debate whether to hike interest rates this year. Inflation has remained below the central bank’s 2 percent target for more than 30 consecutive months. The Fed’s preferred inflation gauge, the personal consumption expenditures index, rose 0.7 in December from a year earlier, down from a 1.2 percent increase in November. This was the weakest reading since October 2009.

Meanwhile, U.S. consumer prices posted their sharpest drop in six years in December, driven by the energy crash. The Consumer Price Index, which measures the average of prices of consumer goods and services, such as transportation, food and medical care, declined 0.4 percent in December after falling 0.3 percent in November, the Bureau of Labor Statistics said Jan. 16.

The Fed also said, however, that once the "transitory" effects of lower oil prices subside, the central bank expects to see a gradual increase in inflation. “We are starting to see gasoline price stabilize and even move a bit higher, so we’re likely to see inflation stabilize over the next couple of months,” said Gus Faucher, senior macro economist at PNC Financial Services Group.

The Fed has indicated that even if inflation is below its target, it won't be enough to prevent a rate hike.