Euro Economies Will Keep Fed from Raising Rates

February 24th, 2015

Federal Reserve Chair, Janet Yellen, is scheduled to testify before the Senate Committee on Banking, Housing and Urban Affairs today. The committee and agency already released her testimony this morning. Despite little reaction from Wall Street, Yellen’s testimony provides insight into what the markets should expect from the Federal Open Markets Committee (FOMC) and European economies in upcoming months.

In her testimony, Chair Yellen cites positive performance in domestic markets.  She states, “At the same time that the labor market situation has improved, domestic spending and production have been increasing at a solid rate.”  The Federal Reserve predicts that gross domestic product (GDP) gains will “be strong enough to result in further gradual decline in the unemployment rate.”  The testimony also mentions improvements in consumer spending and household purchasing power.

Despite domestic conditions, the FOMC will likely hold off on raising the federal funds rate due to worsening conditions across the European Union (EU).  Chair Yellen states, “In the euro area, recovery remains slow, and inflation has fallen to very low levels … downside risks to economic activity in the region remain.”  Accordingly, the FOMC plans to keep the target federal funds rate around 0 to 0.25 percent, and will “be patient” in beginning to raise rates.  The testimony states, “it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.” Based on the testimony, it appears that the low interest rate environment is here to stay, at least in the short term.  However, committee questioning today could shed more light on the Federal Reserve’s policy plans and concerns.

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