Fed Rate Hike Awaits Improving Labor Market

The life and annuity business has its fingers crossed, hoping that interest rates will start going up this year, albeit “not too high and not too fast.”

No one needs to fret about that last part because, as the world knows, the September meeting of the Federal Reserve Board’s Federal Open Market Committee (FOMC) came and went with no increase at all.

Still, the Fed is signaling that it is aware of mounting buzz around a possible increase, and around its recent decision to hold the line a while longer. It is also signaling awareness that expectations around rate increase possibilities could impact the economy.

The vice chairman of the Federal Reserve Board, Stanley Fischer, brought the subject up in published remarks from his Sunday address before the Group of Thirty International Banking Seminar in Lima, Peru.

His comments provide a revealing look at factors the Fed is watching, plus an indication that Fed is still not inclined to “just do it.”

Expectations

Fischer indicated that he, like many others, has been anticipating an uptick later this year, but only if certain conditions come about.

Here’s how he put it: At the end of the September meeting, “the FOMC noted that it anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to 2 percent over the medium term.”

These expectations were alive even before the meeting.

For instance, in the Summary of Economic Projections, which had been prepared by FOMC participants in advance of the meeting, Fischer said, “most participants, myself included,” anticipated that achieving these conditions would entail an initial increase in the federal funds rate later this year. That expectation assumed continued solid economic growth and further improvement in the labor market, he added.

“A great deal of market attention has focused on the exact timing of our first increase in the funds rate,” Fischer observed. “But what matters for overall financial conditions are expectations for the entire trajectory of short-term interest rates.”

In that regard, he said, “most members” of the FOMC anticipate that economic conditions are likely to warrant raising short-term interest rates at a gradual pace over the next few years.

Not a commitment

However, he added, “that is an expectation, not a commitment.”

The decision in September not to raise rates has “generated a great deal of discussion at this meeting of the International Monetary Fund (IMF) and World Bank and elsewhere,” the vice chair noted in the published text of his remarks.

One of the contributing factors was a desire to have more time to appraise recent developments in the global economy, he said, pointing especially to developments originating in the Chinese economy. In general, foreign economic developments are having an “increasing influence” on the U.S. economy, and the Fed is “monitoring developments abroad,” he noted.

Another thing the Fed is monitoring is, “as always,” developments that “could affect our sense of the economic outlook and the risks surrounding that outlook,” he said. This is where the subject of expectations comes into play.

Among the risks Fischer identified is the possibility that “shifting expectations” concerning U.S. interest rates “could lead to more volatility.” He was referring to volatility in financial markets and the value of the dollar, “intensifying spillovers to other economies, including emerging market economies.”

Although Fischer did not predict whether the Federal funds rate would increase by year end, his comments did highlight a few items that insurance experts might want to keep in mind.

First, it is unlikely that the FMOC’s future decision will be made in a vacuum.

Second, the Fed’s thinking on rates increasingly incorporate global factors as well as U.S. factors. Is this a model for the business future?

Third, shifting expectations may have the potential to, as Fischer put it, lead to more volatility. Generally speaking, more volatility is not something the insurance industry wants to see.

Just do it?

Fischer said conversations at the conference had made it clear that many officials of emerging market and other countries “feel sufficiently forewarned and prepared for them to want us to just do it."

The “just do it” approach doesn’t appear to be on the table, though. “We have to remain cognizant of the risks ahead,” Fischer said.

“We remain committed to communicating our intentions as clearly as possible—but not more clearly than the facts warrant—to assist market participants, be they in the private or the public sector, in understanding our intentions as they make their investment decisions.”

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.

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