Economy still weaker, rate hike delayed

Almost a week ago, we wrote that, on the one hand, the sluggishness of the US economy may bring a long-awaited correction to US stocks. On the other hand, we thought that the same sluggishness of the economy may delay an interest rate hike by the Federal Reserve which would support US stocks. Today’s announcement by the Fed’s Chairwoman Janet Yellen basically follows the latter scenario.

In her statement today, Janet Yellen said that the US economy has picked up somewhat after the slow first quarter. However, that growth is apparently not enough. Some analysts are expecting a 2.5% growth of the US GDP in the second quarter, for the year as a whole, the growth is expected at 1.8%-2.0% for 2015. In the past three months, the US economy has been adding around 210,000 jobs monthly which has maintained the unemployment rate at 5.5%, down from 6.3% a year ago and 7.5% two years ago. But that job growth was down from the average monthly growth last year. Yellen also cited the inflation rate which was lower than the Fed’s 2% target.

All these indicators have apparently fallen short of the Fed’s targets that would be required to raise the rates immediately. Janet Yellen said that the Fed wants to raise rates “gradually,” at up to 1% per year, or about 0.25% every other meeting. The rate thus may be raised by 0.25% in September 2015 at the earliest, if economic indicators improve. The continuation of the easy monetary policy has supported the US stocks – S&P 500 is up by around 1% since the Fed’s intentions became clear.

Ukrainian Credit Union Limited