Federal Reserve Commentary

Susan Jung |

With Federal Reserve minutes released this week, market watchers analyze transcripts for clues to interest rate policy. Interest rate policy matters as it does impact economic growth. As stated in last week’s update, what is key is the slope of the interest rate increases. The steeper the slope, the more troublesome it is for fixed and equity markets. In general, gradual increases are less problematic. 

Federal Reserve Board governors make speeches on a regular basis and it is helpful to analyze the information they provide in discussions at events. One such event happened this week and was covered extensively by the media. A summary was provided by Reuters and that information is provided below. It is illuminating. 

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Fed's Harker sees two U.S. rate hikes this year (Reuters staff)
    
Feb 21 (Reuters) - Philadelphia Federal Reserve Bank President Patrick Harker on Wednesday said he still thinks just two interest-rate hikes this year is “likely appropriate,” but signaled he is open to more if needed.

“Based on the relatively strong economy, but the continued stubbornness of inflation, I’ve penciled in two hikes for 2018,” Harker said in remarks prepared for delivery at Saint Louis University in St. Louis, Missouri. “I use pencil because the data can change, and sometimes they don’t accurately point to future events.”

The Fed is widely expected to raise interest rates next month, the first of what many at the Fed believe should be three rate hikes this year. A recent strengthening in inflation data have helped convince many in financial markets that the Fed will need at least three rate hikes in 2018 to prevent the economy from overheating.

In his prepared remarks, Harker made no mention of the recent inflation data, nor of the tax cuts that some view as fueling faster price rises. Sticking closely to a view he laid out earlier this year, Harker said he expects the U.S. economy to grow 2.5 percent this year before slowing to 2-percent growth next year and to below 2 percent in 2020.

Unemployment, he forecast, will fall from 4.1 percent now to 3.6 percent by the middle of next year before rising back up a few tenths of a percentage point, while job growth will remain strong. And inflation, while still below the Fed’s 2-percent goal, should meet or exceed that objective by the end of 2019, he forecast.

“The Fed’s mantra is data dependent, and for now, the data continue to tell me two (rate hikes) is the likely appropriate path,” said Harker, who does not have a vote on the Fed’s policy-setting committee this year but who takes part in the panel’s regular meetings. (Reporting by Ann Saphir Editing by Chizu Nomiyama)

https://www.reuters.com/article/usa-fed-harker/feds-harker-sees-two-u-s-rate-hikes-this-year-idUSN9N1OL025 

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It continues to be our belief that interest rates will rise but not at the pace that some fear. The pace outlined in this article seems reasonable to us and that monitoring inflation is an important factor on our views. We believe that many Federal Reserve Board governors are significantly focused on the potential of pushing the US into recession if rates rise too quickly. We believe the Federal Reserve will make a judgment that a little bit of inflation is better than the potential of a recession.

As you know, interest rate policy is a key factor we assess on an ongoing basis. Our investment strategies take into account our views on interest rate policy. Every week we discuss in detail our portfolio strategies and how they should be positioned based on current economic and market conditions. A key component of that discussion is the direction of interest rates and commentary made by individuals connected to the Federal Reserve.

If you have any questions about this information, do not hesitate to let us know. Always here to answer any questions you might have.
 

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