Searching for clues on Fed direction

Friday gave Fed watchers some clues as to when the Fed may raise interest rates.

One clue is the Consumer Price Index figures, which reported core inflation rising 0.3% in April, the largest gain since January 2013.  The core rate has risen 1.8% in the past year, and the Fed has indicated it would like to see inflation head towards 2% before raising interest rates.

Another clue comes straight from Federal Reserve chair Janet Yellen, who spoke to a business group on Friday about the U.S. economic outlook. “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate,” she said. Yellen also said that any rate hikes would be gradual.

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“The Fed’s going to be looking at a couple things,” said Michael Hanson, Bank of America Merrill Lynch Senior U.S. Economist, who once worked at the Fed.  “First of all, was the first quarter just an aberration, or are we going to have softer growth going forward? Because if we have the latter, then it’s going to be very hard for the Fed to hike even in September.”

The Fed will also be keeping a close eye on the labor markets.  While the labor market is nearing full strength, “we are not there yet,” Yellen said. “They’re going to be looking for the labor markets continuing to improve,” said Hanson.  “We definitely had some weak numbers in March, but a bit better data in April, so if that trend continues, it makes it a little easier for the Fed to go. And of course inflation… the Fed’s going to keep looking at that.”

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