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Low Wages, High Dollar Test Fed's Patience

March 16, 2015
After holding the benchmark federal funds rate at zero for more than six years of crisis and recovery, the Fed has stoked expectations of a hike for months.

WASHINGTON – How patient will Fed chair Janet Yellen be?

That's the question as the Federal Reserve heads into a policy meeting this week that could set the clock ticking for a midyear increase in interest rates.

After holding the benchmark federal funds rate at zero for more than six years of crisis and recovery, the Fed has stoked expectations of a hike for months.

But it has also stressed that it "can be patient" before taking the big step, leaving analysts and investors in debate, over just how fast or slow it could move.

Key metrics of inflation -- the producer and consumer price indices -- are both negative for the past 12 months.

Consumer sentiment has fallen, the housing sector is slower than expected, and poor retail sales in February suggest consumers are not yet comfortable to spend the gains from savings on cheaper gasoline.

"Sales have now fallen in each of the past three months, which rings alarm bells about the health of the U.S. economy," said Chris Williamson of Markit.

"These worrying retail sales numbers, alongside weak inflation and wage growth trends, mean it's likely that the Fed will delay any tightening of policy until a clearer picture of the economy emerges later in the year."

If they do drop "patient" from Wednesday's policy statement, counting two more meetings, that would open the door to the first rate increase in June.

Recent comments have shown some Fed officials clearly anxious to take the first step.

"I think that by mid-year it will be the time to have a serious discussion about starting to raise rates," said John Williams, president of the Fed's San Francisco
 branch, in early March.

"I see a safer course in a gradual increase, and that calls for starting a bit earlier."

Nariman Behravesh, chief economist at IHS Global Insight, says all the signs have been for a rate hike at midyear.

"I don't think it's going to delay... It sure looks like they are going to hike rates in June. But as long as the dollar's strength continues, they've got this stiff headwind, you could see the Fed, after the first hike, proceed very slowly."

Copyright Agence France-Presse, 2015

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