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BUSINESS
Federal Reserve System

First take: Don't bet on June rate hike

John Waggoner
USA TODAY

The Federal Reserve is clearing the road for a rate hike this year, but the highway probably won't be open until the fall.

Federal Reserve Chair Janet Yellen speaks during a news conference Wednesday.

Analysts homed in on the word "patient," arguing that its removal from the Fed's statement, released Wednesday, would herald a rate hike, possibly as soon as June. But the Fed has tempered expectations for a rate hike at the same time.

"The statement was altered enough to suggest that June seems unlikely for a rate increase," says Kim Rupert, managing director of global fixed income analysis at Action Economics.

Stocks rallied on the Fed news, going from slightly negative to sharp gains.

Why the delay? "The economy has moderated somewhat," Rupert says. "They are concerned about the low level of inflation — and the job market isn't where they want it."

The Fed's job is to protect against inflation while maintaining full employment. The employment part of the equation has moved closer to the neighborhood the Fed hoped. The unemployment rate in February was 5.5%, down from a high of 10% in October 2009. The number of total unemployed still remains high.

"Unemployment projections over the next few years are generally lower than December projections," Fed Chair Janet Yellen said at her news conference Wednesday.

There seems to be little sign of inflation, which had fallen 0.1% the 12 months ended February if you include food and energy. Excluding food and energy, consumer prices rose 1.6%.

Recent indicators of economic growth haven't been encouraging. The producer price index, which measures inflation at the business level, fell 0.5% in February, and 0.6% the previous 12 months — the largest since the series was revamped in 2009. The New York Fed's Empire State general business conditions index fell to 6.90 in March from February's 7.78.

More importantly, wages, a lagging economic indicator, haven't shown signs of getting out of control. Average weekly earnings have gained 2.6%, to $857.30, the past 12 months.

The Fed may be worried about the ghosts of 1937, in the depths of the Great Depression. Interest rates were near zero then, too. The Fed raised interest rates, sending the economy back into recession and sending the stock market down 50%.

Continued low rates means savers will continue to get little or nothing on money market accounts or bank CDs. Because the Fed's actions mean it's concerned about a flagging economy, bond prices are likely to rise — and lower yields. The bond market typically rallies when investors sense slower economic growth.

The stock market, more mercurial than the bond market, is likely to rally. After all, where else are you going to put your money?

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