The Fed, Wall Street, Economists Love Rate Hikes

Wall Street

A remarkable unanimity has emerged among the Federal Reserve, Wall Street investors and economists over the need to boost interest rates multiple times – three groups that often have been at odds over when and how high the Fed should move, according to a story in Bloomberg.

The Fed is widely expected to announce a hike on Wednesday after its meeting of policy makers. Some experts also say the Fed must move more quickly to raise rates to head off inflation. (See also: Is The Fed Behind the Curve?)

The Fed only a year ago backed off from earlier plans to boost rates four times in 2016. Now, after nearly a decade in which the Federal Reserve Board kept interest rates near zero to stimulate the economy and stabilize the securities markets, the median expectation of 45 economists surveyed by Bloomberg on March 7-8 is that the Fed Funds Rate will be raised from its current 0.75% to 1.50% by year-end, in three increments of 0.25% implemented in March, June and December. They also expect the current cycle of Fed monetary tightening to continue into the second quarter of 2019, with the Fed Funds Rate rising as high as 3.0%.

Many investors also view rate hikes with the same positive conviction, as illustrated by the ascent of the Standard and Poor’s 500 Index and the Dow Jones Industrial Average to one record level after another. “Getting the federal funds rate closer to normal isn’t a death knell for risk assets anymore,” Jason Trennert, chairman and CEO of Strategas Research Partners, told the Wall Street Journal. “The Fed has a long way to go to get from super accommodative to just accommodative,” he told the Journal.

The financial markets are now giving three rate hikes in 2017 more than a 50% probability, based on the prices of futures contracts linked to the Fed Funds Rate, Bloomberg said in its March 13 story.

Thomas Costerg, senior U.S. economist at Standard Chartered Bank, told Bloomberg: “For once, the Fed and the Street seem to be aligned. That’s good news because it means volatility can remain low. There’s no need to alter market expectations.”

Overheated or Fragile Economy?
Hawkish sentiment at the Fed has been sparked by recent positive economic data, including on jobs. Among the economists surveyed by Bloomberg, 55% now believe that actual economic growth and inflation are more likely to exceed current forecasts than to fall below them. Only 13% see more downside risk than upside potential, and the remaining 32%, like the Fed itself, Bloomberg says, give equal odds to the upside and the downside.

Many organizations see modest growth for the U.S. economy this year and in 2018. The OECD forecasts 2.4% GDP growth for the U.S. in 2017 and 2.8% in 2018, both up from 1.6% in 2016, according to its Interim Economic Outlook published on March 7. These figures are up 0.1% and down 0.2%, respectively, from its November release. The World Bank, meanwhile, projects 2.2% growth in 2017 and 2.1% in 2018, according to its Global Economic Prospects report released in January. The World Bank assumed no changes in U.S. economic policy, but noted that the net effect of Trump administration proposals is likely to raise these figures.

Impact of Trump
President Trump’s policies are expected to have a net positive economic impact by 62% of the economists surveyed by Bloomberg, while 23% foresee a net negative effect. A common concern is that protectionism and restrictive immigration will be negatives offsetting some of the positives. Additionally, Trump’s advocacy of both increased infrastructure spending and tax cuts, while stimulative, are also expected to have an inflationary impact, which would push interest rates yet higher.