When should FED hike the rate in 2015?

Anyone remotely close to Forex market would know that the timing of US interest rate hike is the most analyzed event in last one year. The US dollar has been the best performing currency ever-since financial markets started to factor in US interest rate hike. To put things into perspective the US dollar index, which measures strength of US dollar against major currency pairs, has gained more than 21% in last 13 months. The US economic recovery has been modest, while other major economies continued to struggle against weak demand and low inflation. The labor market activity has been picking up steam with US unemployment claims falling to 42 year low levels and inflation has been showing modest recovery despite weak crude oil prices. These strong economic numbers allow the US Fed to ponder over interest rate hike, while Europe and Japan are yet to conclude their quantitative easing program me.

Ever Since October’2014 Fed meeting, where in FED finally concluded its bond buying program-me, market participants have been closely following FED meeting statements, meeting minutes and public speech of FOMC members for cues regarding the rate hike. The US Fed, who has bench-marked economic data as the main driver for rate hike, has evolved its stance on rate hike from ‘Considerable Time’ to ‘Patient’ and finally to ‘anytime lift off’.  Along the journey US dollar bulls have cheered every positive economic data pushing US dollar index above 100 levels. (The US Dollar index started in March 1973 at 100 level, soon after the dismantling of the Bretton Woods system)

This dream run of the US dollar was finally halted by so called transitory factors, which pushed US economy into temporary recession. Transitory factor such as unfavorable weather conditions, weak crude oil prices pushed the retail sales and core durable goods order into negative territory. Accordingly, the US FED revised the economic projection downward, but maintained that it will remain on a path of rate hike. The clouds over US interest rate hike deepened amid ongoing Chinese and Greece economic crisis. The US FED had acknowledged that it will remain mindful of the global economic condition before hiking the rates. From last few weeks the tide has again turned in favor of US dollar bulls as US economic recovery seems to have turned a corner. The US economy showed signs of strong recovery with core-durable goods order printing 0.8% growth and unemployment rate falling to its seven year low of 5.3% levels.  The US home sales data has also been beating estimates by sufficient margins, which raises the concerns of asset bubble.

Though, Central Bankers have a habit of backtracking of its own forward guidance (Interesting Read) but they tend to have a strong underlying reason for the same. The US FED Chairperson, Ms. Janet Yellen has acknowledged the economic recovery and prepared the markets regarding a possible interest rate hike later this year. So now the real question is – when should FED hike the rate in 2015? When is right time to apply the brakes; when you are going with the current or against the current? If you can answer this correctly, you would realize that if at all US FED wants to hike interest rate this year than September or October would be an ideal time for raising the interest rates, as US economic growth tends to peak in third quarter.Hence, the economy would be resilient to sustain the interest rate hike without losing much of momentum. Moreover, The US economy growth has shown seasonality trend as it tends struggle in first quarter, which rules out interest rate hike in December 

Source: http://www.federalreserve.gov/, www.BloombergView.com