By: Dr. Lynn Reaser
Last week the Federal Reserve ended its third wave of Quantitative Easing, which saw it take its balance sheet up to $4.5 trillion through the purchase of Treasury and mortgage securities. It has indicated that the next step will be a rise in interest rates. How soon and how much is that likely to be?
With inflation subdued and ongoing volatility in the economic data, the Fed is in no hurry to raise interest rates. Slowing in Europe, Japan, China, and other nations remains a significant risk. Monetary policymakers will continue to monitor a wide range of indicators to gauge whether inflation is moving towards their 2.0% objective and whether we are approaching full employment. The first interest rate hike will probably not be before June 2015 and further increases will be gradual. Long-term interest rates can be expected to rise more quickly.
On balance, the near-term may be quiet, but interest rates are likely to be substantially higher over the next two to three years.