Tags: fed | rate | hike | janet yellen

Brace for 3 Fed Rate Hikes This Year

Brace for 3 Fed Rate Hikes This Year
(Dollar Photo Club)

By    |   Monday, 06 March 2017 08:40 AM

Fed Chair Yellen on Friday had in her prepared speech the opportunity to refute market expectations of a March rate increase.

Yellen stated, among a lot of other things: “Looking ahead, we continue to expect the evolution of the economy to warrant further gradual increases in the target range for the federal funds rate … The economy has essentially met the employment portion of our mandate and inflation is moving closer to our 2 percent objective … we realize that waiting too long to scale back some of our support could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession.”

Yellen chose not to refute market expectations of a March rate increase.

With what we know today, I think it’s fair to expect that the Fed will raise rates next Wednesday by 25 basis points (bps), hereby lifting the Fed funds target range to 75 - 100 bps.

I also expect that we could have at least two further rate increases this year plus a potential tapering of the Fed’s balance sheet reinvestments.

Of course, nothing is written in stone.

So, what has changed the Fed’s view?

Inflation is more visible, but this was obviously going to happen with the ending of the oil price distortion.

The U.S. labor market is tight, but it has been tight for some time.

What may have tipped the balance is the fact that the U.S. labor market has tightened for lower skilled, lower income workers that during the last year had started getting pay increases.

Yellen has always had a specific concern for the faith of lower skilled Americans, and in fairness there is a relatively large number of people in this category compared to other developed economies.

The economic theory of “hysteresis” suggests that the longer people are out of work, the less likely it is that they will find work and that, among other things, because the labor market normalized, some unemployed people may be disinterested in returning to the work force.

That hysteresis situation that applies to the U.S. labor market may have caused Yellen to remain behind the curve on monetary policy until the faith of low skilled American has begun to improve.

The big unanswered question now is to what extent could the changed view of the Fed cause an acceleration of the tightening cycle.

Yellen's press conference after the Federal Open Market Committee’s (FOMC) decision on monetary policy could become really interesting and enlightening.

All that said, in U.S. politics, a Trump twitter feed over the weekend has focused on interference in the recent presidential election.

The twitter feed reads: 

Trump leveled the charges in a flurry of tweets shortly after dawn, amid an avalanche of recent revelations about communications between Russian officials and some of his senior aides, including Attorney General Jeff Sessions.

Obama's office did not immediately respond to a request for comment from Reuters.

Meanwhile, the substance of this is of limited interest to investors, but there are however two factors that makes this relevant to markets:

  • The reaction of some Republicans in Congress already raises questions about the relations between the White House and Capitol Hill and that is relevant to an awful lot of policy that matters to markets.
  • The accusation does suggest something about President Trump’s views on the extent of Presidential authority and, again, that might have a bearing on the approach to things like for example trade policy.

Over in the euro area we just had the release of the final figures of Greece’s seasonally adjusted Q4 GDP that came in at -1.2percent quarter-over-quarter (Q/Q), down from previously -0.4 percent q/q and at -1.1% year-over-year (y/y), down from +0.3 percent previously, which was substantially worse than expected.

Greece’s debt ratios will further rise as GDP is continuous to contract. Last year, the IMF’s updated analysis on the sustainability of Greek debt already showed that Greece’s debt was unsustainable. Now, in the meantime, it got worse.

At the moment, the euro area is already facing high political risks with national elections in the Netherlands within 2 weeks, France in May, maybe Italy somewhere in the middle of the year and finally in Germany in September.

Investors should better be cautious as Grexit could come back on the table once the elections in the EU are over… and that will matter.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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I also expect that we could have at least two further rate increases this year plus a potential tapering of the Fed’s balance sheet reinvestments.
fed, rate, hike, janet yellen
Monday, 06 March 2017 08:40 AM
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