Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Bio
X •  LinkedIn
   Bob Stein
Deputy Chief Economist
Bio
X •  LinkedIn
 
  Fed Projects Very Slow Path for Rate Hikes
Posted Under: Government • Research Reports • Fed Reserve • Interest Rates
Supporting Image for Blog Post

 

At her post-meeting press conference Fed Chief Janet Yellen emphasized that it's important not to "overreact" to one or two reports on the economy.  But that's exactly what the Fed did by refraining from raising rates at today's meeting and notably altering its projections for future rate hikes.

Although the Fed stuck to its projection of two 25 basis point rate hikes in 2016, the projected path for future years came down.  Back in March, the median forecast at the Fed suggested at least 2 percentage points (200 basis points) of rate hikes in 2017 and 2018, combined.  Now the median forecast is for an increase of 1.5 percentage points (150 basis points) over the same time frame. 

In addition, the Fed once again brought down its estimate of the long-term average for the federal funds rate.  As recently as December, the Fed pegged the long-term average at 3.5%.  That came down to 3.25% in March and is now only 3%.

What's odd about the changes in the expected path for rate hikes is that it was not accompanied by any significant changes in the economic outlook.  Real GDP growth was downgraded very slightly for 2016-17, but the inflation forecast was revised up slightly, leaving the pace of nominal GDP growth essentially unchanged. 

The Fed made some changes to the language in its official statement, but nothing earthshattering.  The Fed acknowledged slower improvement in the labor market but faster growth in the overall economy, exactly the opposite of what it said back in April, consistent with recent economic reports.  On the hawkish side, the Fed noted better household spending and less of a drag from exports.  However, the Fed pleased the doves by mentioning lower market-based measures of inflation compensation.     

The bottom line is that it's hard to read today's statement as anything other than the Fed getting spooked by the recent employment report.  Even Kansas City Fed Bank President Esther George, who voted to hike rates by 25 basis points in April, voted in favor of today's official statement. 

We still think the Fed is headed for two rate hikes later this year, one in either July or September, and another in December.  However, it now looks like September is a better bet than July and, given how easily and often the Fed has been spooked by economic reports and market fluctuations in the past several years, it's plausible they won't raise rates again until 2017.  

But a slower path for rate hikes is not good for the US economy.  Overly loose monetary policy will create financial and economic imbalances that will cost the economy in the long run.    

The economy can handle higher short-term rates. The unemployment rate is already below the Fed's long-term projection of 4.8% and nominal GDP growth – real GDP growth plus inflation – is up at a 3.6% annual rate in the past two years.  Slightly higher short-term interest rates are not going to derail the US expansion, but will help avoid the misallocation of capital that's inevitable if short-term rates remain artificially low.   

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

Click here for PDF version

Posted on Wednesday, June 15, 2016 @ 3:37 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
 PREVIOUS POSTS
Industrial Production Declined 0.4% in May
The Producer Price Index Increased 0.4% in May
Retail sales increased 0.5% in May
Why Does Japan Still Charge Taxes?
M2 and C&I Loan Growth
Nonfarm Productivity Declined at a 0.6% Annual Rate in the First Quarter
Brexit Is Freedom
M2 and C&I Loan Growth
Nonfarm Payrolls Increased 38,000 in May
The ISM Non-Manufacturing Index Fell to 52.9 in May
Archive
Skip Navigation Links.
Expand 20242024
Expand 20232023
Expand 20222022
Expand 20212021
Expand 20202020
Expand 20192019
Expand 20182018
Expand 20172017
Expand 20162016
Expand 20152015
Expand 20142014
Expand 20132013
Expand 20122012
Expand 20112011
Expand 20102010

Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.