The long-running debate on when the US Federal Reserve will start raising rates has been laid to rest for now. At its September meeting the Federal Open Market Committee (FOMC) left its target for the Federal Funds Rate (FFR, the policy rate) unchanged at 0.00%-0.25%, thereby postponing a historic first step towards normalizing monetary policy. The rate has been at near-zero since December 2008.
The focus is now on the other two FOMC meetings in 2015; 13 of the 17 members of the FOMC stated that it will be appropriate to start raising rates in 2015, leaving the door open for liftoff in December — and possibly even earlier, in October.
The exact date of the rate rise is of little consequence to broader macroeconomic performance, but Dun & Bradstreet advises businesses to prepare for rates to rise by the end of the year.
The trajectory of the policy rate and the pace of rate increases after the first one are far more important in defining the role of monetary policy to guide the economy’s expansion and hence for business planning. We expect subsequent increases in the FFR to be small, reaching only 1% at the end of 2016.
Following the FOMC’s decision, and the forward guidance available from the Federal Reserve, Dun & Bradstreet has left unchanged its near-term forecast for the US economy. We expect real GDP to expand 2.3% in 2015, accelerating to 2.9% in 2016. (D&B’s full special briefing on the Fed’s decision is available here.)
The main driver behind the middling forecast for this year is the insight provided by our proprietary leading indicators. D&B’s Small Business Health Index (SBHI) slid by 0.1 points to start Q3. July’s reading of 96.3 is still above the Q2 average of 95.5, and equal to the Q1 average of 96.3, but it still falls well short of its December 2014 peak of 98.7.
Through the ups and downs in the last 12 months, we have continued to see the trend in the SBHI point upward, which means the economy has improved, and heading into the final few months of 2015, small-business operating conditions are better than they were at this time last year.
This pattern is also seen in D&B’s US Business Health Index, a measure of the broad financial health of US businesses. If we look past the month-to-month fluctuations, the BHI has held above the 50% mark that separates overall balance sheet improvement from deterioration. The index rose by a solid 70 basis points to reach a new high of 54.1% in August 2015. In other words, in the event of an exogenous shock, balance sheets of US corporations are likely to be able to withstand it, rather than succumb to it.
In summary, D&B’s micro data signal that fundamentals of the US economy are healthy and growth will continue at a decent pace over the next few months. Our data indicate that the labor market will remain relatively strong and should eventually lead to wage pressures and thus inflationary uplift. Consumers have been spending, albeit relatively cautiously in recent months, but remain well placed to ramp up spending, particularly as wage growth improves.
Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.
Photo courtesy of the Federal Reserve.