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Economist: The Pace of Fed Rate Hikes May Be Faster Than You Think

Thursday, 02 Jul 2015 07:57 AM

Once you've asked when the first Fed rate hike in nearly a decade will occur, the next question on your mind is probably when the second hike will come. 

The Fed has continued to suggest that the pace of hikes will be gradual, but Torsten Sløk, Deutsche Bank's chief international economist, shared two charts regarding wage inflation that he says call that into question.

According to Sløk, the fed funds rate needs to hit its neutral level to cool down the economy, and that level is not 0.25 percent or 0.50 percent, but "somewhere around 3 to 3.5 percent."

With such a gradual pace, the Fed doesn't expect to hit that level until 2018. Cue the first chart. It shows the Employment Cost Index for wages and salaries and the fed funds rate with the median dots from its forecasts. 

After that, Sløk addressed the possibility that more people will enter the labor force and hold back wage growth. Spoiler alert: He says that's not very likely. What's more, he looked at the Fed's own research to draw that conclusion. 

His conclusion? You should probably get ready for a faster pace of rate hikes. 

Bottom line: Thinking about where the labor market is relative to full capacity, the risks are rising that the Fed will have to raise rates faster than what the dots currently predict.


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Economist: The Pace of Fed Rate Hikes May Be Faster Than You Think
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2015-57-02
Thursday, 02 Jul 2015 07:57 AM
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