It’s not clear whether steady-but-lackluster growth is now as good as it gets, or whether the economy is just starting to heat up. “Most people won’t even notice”.
Advertisement
The US Federal Reserve’s move to raise policy rates wasn’t a surprise, but a landmark decision nevertheless. In 2016, economists expect the Fed to hike rates another three or four times, which could bring the federal funds rate to 1.25 to 1.50 percent by the end of the year. A raise will only happen with more economic activity and a lower unemployment rate. It will reduce those incentives as it pushes up rates.
Among the Fed’s communications were the Summary of Economic Projections and the “dots”; together, they underscored the dovish nature of the Fed’s December 16 decision, but they also raised some eyebrows.
Led by household and business spending, the economy is expected to grow by 2.4 percent in 2016 and 2.3 percent in 2017.
I believe the Fed will be more balanced in its approach and will likely engage in a lively debate; we are nowhere close to having known hawks such as former Philadelphia Fed president Plosser or former Dallas Fed president Fisher as voting members next year.
Federal Reserve Chair Janet Yellen speaks at a news conference Wednesday after announcing that the Federal Reserve raised its key interest rate by quarter-point. But there is already considerable divergence among Fed officials. For a while now, Fed policymakers had implied – or at least, markets had clearly inferred – that a first rate hike would probably come by the end of this year. Williams – who worked for Yellen when she ran the San Francisco Fed before handing the reins to him, and whose views are seen to align closely with hers – said his own view is in line with that expectation. The median forecast for the end of 2016 is 1.4 percent, or a roughly one percentage point increase over the next 12 months, and all but three of the Fed’s 17 canvassed policymakers see the rate at that point or lower next year.
I furthermore foresee that the interest curve will flatten somewhat, with 10-year rates increasing by half as much as shorter-term rates.
“I think one of the trickiest and most important parts will be trying to figure out what’s going on with inflation”, Faust said.
The economy had its share of ups and downs over the past year.
The dollar index, which measures the greenback against six major peers, was up 1.39 percent at 99.233 in late trading.
So, for example, suppose that the economy is experiencing 2% inflation and the GDP is exactly where it is expected to be (there is no deviation from potential, or how much economists thing GDP should be). This is because if growth collapses, the Fed will not hike rates-and these futures contracts will rise in price, working as a hedge against that event. The Fed shouldn’t let trivialities knock it off this course. After all, the Fed appears to be successful lately at shaping them. Trade of the emerging world increases with China as the second largest economy of the world grows, its influence on Malaysia and the rest of Asia has become more affixed.
The Fed has other reasons to press ahead with raising rates. This rate hike could attract capital toward dollar-denominated assets.
Regulators have pointed to a number of worrisome signs in recent weeks.
Unlike petroleum and natural gas, which tanked most of the week, livestock prices, especially cattle, exploded as congressional leaders moved to repeal a rule requiring that meats sold in the U.S.be labeled according to their country of origin.
As Frank Curzio showed you yesterday, higher rates mean more revenues for banks. “We can’t afford to wait until the warning lights turn red”.
But the Fed’s statement suggested that rates would remain historically low well into the future, saying it expects “only gradual increases”.
By far, the riskiest impact from raising rates will be in currency markets.
Advertisement
Higher rates also reduce the incentives for risk-taking by banks and other lenders by fattening their profit margins. Conventional thinking of the past is that higher rates in the United States does put pressure on central banks elsewhere to follow suit.
