Economy Watch: Higher Interest Rates? A Definite Maybe

The Federal Open Market Committee's latest meeting showed that the Fed remains split on whether a near-term interest rate hike is justified.
Janet Yellen, Chair of the Board of Governors of the Federal Reserve System

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System

On Wednesday, the Federal Open Market Committee released the minutes of its latest meeting, which was held on July 27, showing that the Fed remains split on whether a near-term increase in interest rates is called for. Such a move would raise the cost of borrowing for real estate projects, but on the other hand, it would also help wean the industry just a little off of cheap money, the better perhaps to prevent overbuilding in certain excited sectors (such as high-end apartments).

In their discussion of the U.S. economic situation, meeting participants agreed that the labor market had strengthened and that economic activity had been expanding at a “moderate” rate. “Moderate” is a common term used by the central bank, but the minutes left open the question of whether the second-quarter GDP report–which came in at an anemic annualized 1.2 percent growth, but wasn’t reported until after the July 27 meeting–will affect the Fed’s assessment of the economy much.

The FOMC also noted that the core inflation rate over the first half of 2016 was expectedly close to an annualized rate of 2 percent, but the committee also said some of the increase reflected “transitory effects that would be… reversed during the second half of the year.” Most forecasts of longer-term inflation remained low.

On the whole, some committee members seem to be more optimistic than others, seeing the near-term risks to further improvement in the U.S. economy as having “diminished.” Yet most of the members remain a little nervous, despite the likes of strong employment reports and other positive metrics, and want more positive data before they’ll pull the trigger on higher rates. Even so, higher rates by the end of the year remain a distinct possibility.