Tags: Fed | Rates | Yellen | Hikes

Fed Will Move Cautiously but Consistently

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Wednesday, 15 Mar 2017 04:30 PM Current | Bio | Archive

  • March 14-15 2017 FOMC Meeting
  • In a Nutshell: “The Fed raises rates and reiterates it will continue to increase them gradually.”
  • Rate Decision: Fed funds rate range increased to between 0.75% and 1.00%

As expected, the Fed raised rates by one-quarter percent today. Was this a ho-hum meeting? Not really. Yes, the FOMC made it clear it intends to follow up with two more hikes this year and three next year, but that doesn’t constitute aggressive behavior. It still leaves the Fed well below its projected long-term rate of roughly 3%. In other words, if people were worried that that rates were going to rise faster than expected, the Committee’s statement and Chair Yellen’s answers to questions at her press conference were all constructed to calm those fears.

There was also some important information in the dot charts that describe the members thinking on inflation, growth and interest rates. The nation’s central bankers and their staffs of hundreds of Ph.D. economists expect GDP to expand at an average of maybe 2% over the next few years. That is in line with their long-term growth forecast, but it is about half as fast as the Trump administration’s growth projections.

That sluggish growth outlook has some enormous implications for fiscal policy. Cutting taxes and increasing spending widen the budget deficit. The administration argues that the deficit increases will not be as large as most private sector economists forecast because they believe growth could reach 4%. If we only get 2% growth, the deficit would skyrocket. Indeed, if the Congressional Budget Office scores the proposed tax and spending changes using growth rates similar to the Fed’s, which they are expected to do, the deficit projections could be really ugly.

One final point when it comes to fiscal policy. Chair Yellen encouraged Congress to pass policies that increase the economy’s growth potential. That means promoting investment not spending. The tax cuts the Trump voters are hoping for don’t fall into the category of capital investment. They are on the consumer spending side and would be more inflationary.

So, what should we expect going forward? Today’s economic data support the view that the Fed will move cautiously but consistently. Consumer inflation, as measured by the Consumer Price Index, is at the Fed’s target. However, the Fed’s preferred measure, the Personal Consumption Expenditure deflator, remains just below target. With energy prices falling, at least temporarily, inflation should not accelerate sharply. Also, February retail sales were soft, indicating that consumer confidence may be up but spending isn’t. Growth this quarter could be disappointing.

At least two more rate hikes this year are expected. If we get a huge fiscal stimulus package, especially one directed at consumers, the increase could total one percentage point.

(The next FOMC meeting is May 2-3, 2017.)

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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JoelNaroff
At least two more rate hikes this year are expected. If we get a huge fiscal stimulus package, especially one directed at consumers, the increase could total one percentage point.
Fed, Rates, Yellen, Hikes
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2017-30-15
Wednesday, 15 Mar 2017 04:30 PM
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