The Federal Open Market Committee, FOMC, of the Federal Reserve voted on Dec. 14 to raise interest rates 0.25%, as we expected. The vote was unanimous including doves such as Fed governor Lael Brainard.
While the rate hike was fully expected by markets, what was not expected was that the Fed struck a hawkish stance on future rate increases. Prior to the December FOMC meeting, the forecast was for two rate hikes before the end of 2017. On Dec. 14, the Fed signaled its intention to increase interest rates three more times in 2017.
The Fed based this more hawkish view on the fact that labor market conditions continue to improve, and slow but steady progress is being made in meeting the Fed’s inflation targets. As long as labor conditions are satisfactory, and inflation is not too high, the Fed will raise rates at a tempo of 1% per year, more or less, until a ‘neutral’ fed funds rate of about 3.25% is achieved.
The Fed is engaged in this tightening cycle not because the economy is running ‘hot’ (it’s not), but because they are desperate to raise rates enough to cut them again in a future recession. The Fed is behind the curve in this process. The Fed should have raised rates to about 3.25% over the course of 2009 to 2013. But, the Fed missed this entire interest rate cycle, instead engaging in fruitless experiments in quantitative easing or QE.
This post was published at Wall Street Examiner on January 2, 2017.
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