Rate Rise Unlikely on Shrinking Deficit, Employment Gains

The Federal Reserve believes a rise in interest rates is unlikely before April.

Notes for the latest Federal Open Market Committee state that the Federal Reserve sees low interest rates continuing throughout the first quarter of this year, despite expectations from a year ago that a rate hike would come early in 2015. “Most participants thought the reference to patience indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings,” the Committee stated in its meeting minutes.

The Federal Reserve believes a rise in interest rates is unlikely before April.

Notes for the latest Federal Open Market Committee state that the Federal Reserve sees low interest rates continuing throughout the first quarter of this year, despite expectations from a year ago that a rate hike would come early in 2015. “Most participants thought the reference to patience indicated that the committee was unlikely to begin the normalization process for at least the next couple of meetings,” the Committee stated in its meeting minutes.

The FOMC noted that the Federal Reserve would remain “patient” in keeping interest rates low, despite earlier concern that inflation was a risk to economic growth.

“A number of participants saw a risk that it could run persistently below their 2% objective, with some expressing concern that such an outcome could undermine the credibility of the committee’s commitment to that objective,” the minutes said.

In December, the Consumer Price Index saw the largest inflation decline in six years, registering just 0.3% price growth. In parts of Europe inflation turned negative and the Eurozone now expects deflation in the first half of the year.

Consumers Gain, Jobs Rise

Thanks to falling energy costs, U.S. consumers’ confidence has grown, which is prompting the Federal Reserve to wait for a sustained pickup in spending and jobs before raising rates. The FOMC already believes “wage and price inflation could rise more than generally anticipated” because of growing consumer confidence.

The most recent Conference Board Consumer Confidence Index reading was at 92.6 on December 30, up from 91 in November.

The labor market appears to be mending, as private payroll firm ADP announced that private sector employment rose by 241,000 month-over-month in December, with goods-producing employment rising by 46,000 jobs in December, a growth rate of 15% from the prior month. Construction added 23,000 jobs, growing 15% from the prior month. Manufacturing saw the strongest growth of all sectors, rising 62.5% month-over-month with 26,000 jobs added.

Trade Deficit Shrinks

While jobs are rising and consumer confidence is booming, the trade deficit is shrinking. According to the Department of Commerce, the trade deficit fell to $39 billion in November as both imports and exports decreased in November.

However, exports are 18% higher than before the 2008 global financial crisis, and imports are 2% above their peak. Both are roughly stable from the same period a year ago.

Both export and import trade were hurt by falling oil prices, as lower commodity prices and the strengthening dollar lowered the dollar value of trade. Crude oil imports fell $2.2 billion, while the U.S. trade deficit with China and the European Union grew.  In November, exports fell 1% month-over-month to $196.4 billion.

Economists expect further deficit reduction due to lower demand for U.S. exports amidst falling global demand and a stronger U.S. dollar that makes American goods and services less competitive.