The US Fed isn’t going to raise interest rates again until Christmas — at the earliest

Donald Trump Christmas Tree rally

Think of it as a really, really gradual pace.

US Federal Reserve officials appear to be warming up to the notion that a decline in inflation away from the central bank’s 2% target might turn out to be more entrenched rather than “transitory,” as policymakers first predicted.

This means that any possible justification for more aggressive interest rate increases has effectively evaporated.

In the July policy statement that accompanied the widely expected decision to leave interest rates on hold, the Fed said, “On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2%.”

Pce price index

There was a minor but crucial difference: inflation had been characterised, more softly, as “somewhat” below target in June. Now it’s just plain there.

In recent speeches, policymakers have offered similar signs of reticence. Most recently, Yellen told lawmakers the inflation drop “is something we’re watching very closely.”

Dallas Fed President Robert Kaplan was even more cautious during a talk in Mexico.
“I think in these periods where you’re getting conflicting signals, the best course of action is to be patient,” Kaplan said. “I simply want to wait, I want to be patient and review more information to see how the economy is unfolding and see evidence that we’re making progress toward our 2-per cent inflation goal.”

The other key detail in the Fed’s statement was the announcement that a reduction of the central bank’s $US4.5 trillion balance sheet will start “relatively soon,” which investors assume means the Fed’s September meeting.

That leaves December as the next obvious opening — one of the quarterly gatherings that actually includes a press conference and new forecasts — for the Fed to raise interest rates. Officials will had time to evaluate inflation developments between now and then.

The September meeting is also accompanied by a press conference, but the balance sheet decision is expected to take up all the oxygen at that meeting, and thus no one is forecasting a rate hike then.

“The Fed’s going to have a difficult time continuing to raise rates if inflation remains well below target,” Greg McBride, chief financial analyst at, told Business Insider. “The concern is growing within the Fed about this persistence below 2%.”

“There’s no urgency for the fed to hike rates again before the fourth quarter,” says Aaron Anderson, senior vice president of research at Fisher Investments. “Inflation has been drifting away from their target and isn’t likely to accelerate much unless bank lending and money supply growth turn around. Both have ticked up recently but not enough to push inflation much higher.”

If the growth and inflation backdrops are so lacklustre, why do stocks continue to rally onward to never-ending records? The stock market has a “long history of whistling past the graveyard,” McBride said. Instead, he prefers to look at government bonds, and there, persistently low yields have hinted at an anemic economy for quite some time.