The Fed will raise interest rates in 2015, according to 95% of economists tracked by Bloomberg. But it could be a closer call than this high percentage indicates, given the changing membership of the Federal Open Market Committee (FOMC) and the state of the economy.
The vote on the Fed’s action in December was approved 7-3; the three dissents from the majority view reflect rising discord inside the Fed over the best course of action. Two of the FOMC’s members who are most optimistic about economic growth and favour rate hikes are retiring: the Philadelphia Fed’s Charles Plosser and Dallas’ Richard Fisher. Another fan of earlier rate hikes, the Cleveland Fed’s Loretta Mester, will not be a voting member in 2015. On the other side, the most vocal proponent at the Fed about keeping rates low is the Minneapolis Fed’s Narayana Kocherlakota, who will not vote next year but will likely be replaced by the similarly minded Charles Evans from the Chicago Fed.
These changes could affect the timing of interest rate hikes — especially if the U.S. economy experiences a soft spot in the first half of the year, which has become a common occurrence in recent years.
Surprise outcome: If the Fed does not raise interest rates in 2015, shorter-term yields in the United States, such as that of the 2-year Treasury note, could reverse part of their rise over the past six months, producing gains for Treasuries. A failure to raise rates could also result in a weaker dollar, which may benefit international markets, including emerging markets.