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What the Fed’s Interest Rate Increase Could Mean for 2017
Federal Reserve Chairwoman Janet Yellen, in a surprisingly bold announcement this past Friday, made clear that the Fed is likely to raise its benchmark interest rate this month.
Economics Professor Aaron Jackson, whose research focuses on monetary policy and inflation, shared his thoughts on the implications of the Fed’s likely decision in the following Q&A:
Q: Why are we seeing a likely interest rate increase now?
Jackson: How the tables have turned on market participants. For many years after the financial crisis, the Fed was the one that was hopelessly overly optimistic about the outlook for rate increases, while markets (mostly correctly) got it right. Now, the Fed is poised to raise interest rates at its next meeting in March, and given the strong labor market and rebound in inflation it is entirely plausible that the Fed may raise rates several more times this year. And this time, it seems that the Fed might have the rate outlook right, with many members of the Fed painting a fairly hawkish outlook. In the meantime, markets are somewhat behind this curve, only projecting three hikes this year (and this is upgraded from barely two hikes just a few weeks ago).
Q: How has President Trump’s election affected the Fed’s anticipated interest rate hike?
Jackson: With Donald Trump’s election, the stock market has maintained its resiliency over the past few months. Despite some uncertainty over whether Trump can enact the major overhauls in regulation, healthcare, and tax policy, the stock market continues to run bullish. Coupled with strong growth outlooks in Europe and Asia, the spillovers from the global recovery will finally align to allow more sustained, stronger growth than we’ve seen in some time.
In addition, with an elevated balance sheet, this gives the Fed the ability to push short term interest rates higher, without having a significant impact on longer term interest and mortgage rates and thereby maintaining a relatively accommodative policy in this tightening cycle.
Q: What’s your outlook for the Fed in 2017?
Jackson: With consumer confidence at its highest, a rebound in inflation, and a strong labor market, this combines for a recipe for a hawkish 2017 for the Fed. President Trump will be filling a number of vacancies on the Board of Governors this year and likely will choose “markets” candidates who tend to be hawkish.
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