Economists React to the Fed’s Interest-Rate Decision: ‘When Is the Next Hike?

W S J:

The Federal Open Market Committee on Wednesday said it would move to raise interest rates by a quarter percentage point, lifting them from near zero for the first time since the recession. Fed officials said economic activity “has been expanding at a moderate pace,” pointing to “solid” household spending and business investment and diminished slack in the labor market this year. Officials emphasized, however, rate increases would proceed gradually. The move was widely expected by economists and markets. Here are comments from economists on Wednesday’s announcement:

“The rate rise has been overhyped and won’t have a big impact on the U.S. economy. Monetary policy is still extraordinarily accommodative. The absence of an economic shock or financial turbulence

[following] the rate rise will restore some confidence that has ebbed as markets have waited for months for the Fed to move.” —Joseph Lake, Economist Intelligence Unit

The deed is done and the Fed has delivered to us all a wonderful holiday gift—something new to write and talk about: When is the next hike?.…Reading from the minutes and the dot plots, the Fed’s plan is for the funds rate to rise to the inflation rate by year-end 2016 and then modestly pull ahead by year end 2017 and then move to a 1.5% real rate by year end 2018. Ah, the sweet world of econometric model outcomes. All of this is, of course, contingent on core inflation rising in 2016 towards their target and, first and foremost, that progress continues for the labor market.” —Steve Blitz, ITG Investment Research

With the rate move a yawner, markets are now looking for the more interesting back story: How slow will they go in their path to monetary policy normalization thereafter? Both the statement and the Fed ‘dots’ continue to support a gradual pace….And the dots point to four more rate hikes next year. In between moves, the FOMC will be able to gauge how the economy absorbs the shock. Sticking with their mantra, that it depends on the data, as economic conditions strengthen further, the Fed will continue to raise rates gradually through the year.” —Beth Ann Bovino, S&P

“As anticipated, the FOMC adjusted its language on inflation, putting actual outcomes on the same level as expected progress. This would slow the pace of rate hikes if inflation keeps surprising to the downside. But the opposite is also true; faster inflation might warrant a faster pace of hikes. Indeed, this increased focus on actual inflation outcomes may increase the volatility of market expectations of the Fed’s tightening path.” —Dana Saporta, Credit Suisse

“In the end, the pace [of future rate increases] will be determined by the data and financial markets developments. We remain skeptical that the pace will be as gradual as is being suggested, mainly because we expect the unemployment rate to keep falling, eventually leading to more upward pressure on inflation. For now, though, it makes sense for officials to be as reassuring for markets as they can without compromising their flexibility later.” —Jim O’Sullivan, High Frequency Economics

“This is the first rise in the funds rate since June 29, 2006, when it was last hiked by 25 basis points to 5.25 percent. In this context, today’s 25 basis-point funds rate target hike could be mistaken for a ‘pinky flick’ in a dead corpse which could be temporarily alarming and frightening to the financial markets, especially those younger members who have never seen a rate hike in their short careers. But, instead, the correct diagnosis is that Fed policy is awakening from a seven year ‘self-induced interest rate coma’ in response to improving vital signs for the U.S. economy, including better job growth, wage and income growth, solid consumer spending, and improving housing activity, at least enough to slowly begin notching up [the] abnormally low funds rate.” —Stuart Hoffman and Gus Faucher, PNC

The intention to tighten at a gradual pace comes with a warning—courtesy, presumably of Stan Fischer—that ‘the actual path of the funds rate will depend on the economic outlook as informed by incoming data.’ The last time the Fed stuck to a promise to take it easy—the ‘measured’ pace of tightening in 2004-to-06, it ended badly, and we have no confidence that the serene glide path for the economy envisaged by the Fed and, especially, the markets, will be achieved this time either.” —Ian Shepherdson, Pantheon Macroeconomics

Normally, raising interest rates is a form of a contractionary monetary policy, meaning that the central bank believes the economy is overheated or strong enough, so that higher rates are necessary to prevent future excessive inflation. But this is not the case today. Inflation has been stubbornly low in the past few years, which is a big concern for the Fed. The FOMC today continued to lower its projection for inflation in the short term.” —Jia Liu, American Institute for Economic Research

“In taking today’s actions, the Federal Reserve has recognized significant improvements in the U.S. economy, and manufacturers recognize that economic conditions today are far better than they were in recent years. At the same time, manufacturers continue to feel anxiety in the face of headwinds like the strong dollar and weaker growth in key international markets. In the latest NAM Manufacturers’ Outlook Survey, manufacturers indicated a preference for the Federal Open Market Committee to wait until these headwinds die down a bit before beginning the process of raising short-term interest rates.” —Chad Moutray, National Association of Manufacturers

“My takeaway from the statement and [Janet Yellen’s] press conference is that there is no Grand Plan for 2016. I believe, though there was no hint at this today, that January’s FOMC meeting is pretty much off the table. That gives the FOMC three months to sit back and watch the incoming Fed data. Recall that the default ‘gradual’ path would dictate moves at every other meeting (the press conference meetings in March, June, September and December). I think market attention will now turn to March.” —Stephen Stanley, Amherst Pierpont Securities

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