Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       

Blog Home
   Brian Wesbury
Chief Economist
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
  Fed Waiting for More Information
Posted Under: GDP • Government • Inflation • Research Reports • Fed Reserve • Interest Rates
After starting liftoff in December, no one really expected much out of today's Fed meeting. And the Fed delivered exactly that, voting unanimously to do...nothing. But despite no action, their wording will get plenty of scrutiny.

The major issue going into today's meeting was whether the Federal Reserve would hint that it was no longer on track to raise rates by a total of one percentage point this year – most likely, in four rate hikes of 25 basis points each – like it suggested in the policy assessment back in December. That path would presumably be implemented by one 25 bp rate hike at the second meeting in each calendar quarter – March, June, September, and December – which coincides with the quarterly Fed press conferences.

On that score, the Fed removed language from December that it sees "the risks to the outlook for both economic activity and the labor market as balanced." It also added language that it "is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook." This resembles the language temporarily added back in September that it was "monitoring developments abroad." The new language is significant because it was in September when many anticipated a rate hike that didn't materialize; the Fed delayed the rate hike until December due to temporary financial market turmoil.

Some analysts might therefore take today's language as a sign the Fed will delay a rate hike beyond the next meeting in March. But we think the Fed has yet to make that decision and a March rate hike is still more likely than not.

First, recent financial market turmoil is unlikely to linger for the next seven weeks, which would take us to the March meeting. Second, the Fed lifted its assessment of the labor market, saying job gains are "strong," rather than "ongoing." Third, although the Fed acknowledged slower economic growth in late 2015, it elsewhere mentioned slower inventories, which only have a temporary influence on growth.

Although the Fed noted a reduction in market-based measures of inflation compensation, it also maintained its view that inflation will rise to 2% over the medium term.

At present, the federal funds futures market anticipates only one rate hike this year. One! We think rate hikes are much more likely to come in closer to what the Fed projected back in December. In turn, this means interest rates across the yield curve should rise a bit faster and further than the market now expects.

The economy can handle higher short-term rates. The unemployment rate is already very close to the Fed's long-term projection of 4.9% and nominal GDP growth – real GDP growth plus inflation – is up at a 3.9% annual rate in the past two years.

Moreover, we are starting to see early signs of accelerating wage inflation. Average hourly earnings rose 2.5% in 2015 versus 1.8% in 2014 and 1.9% in 2013. That might not seem like much, but it's quite generous in an economy where consumer prices rose only 0.7% last year (due to falling energy prices) and where rising fringe benefit costs, like health care, aren't even included in the measure of wages.

After today, look for Fed speakers to highlight "data dependence" over the next few weeks as it gathers information before it's next decision in March.

Brian S. Wesbury, Chief Economist
Robert Stein, Dep. Chief Economist

Click here for PDF version
Posted on Wednesday, January 27, 2016 @ 4:16 PM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2021 All rights reserved.