Consumers jumped on discounts and credit to leverage their incomes in November, with spending slightly outpacing solid, inflation-adjusted, disposable income gains during the month. Spending on big-ticket vehicles and holiday gifts both bounced back Read More
Federal Reserve Chair Janet Yellen successfully corralled the cats, achieving a unanimous vote by the Federal Open Market Committee (FOMC) to lift the fed funds rate by one quarter point to a range between 0.25% to 0.50%. The unanimous vote came with a compromise. The FOMC reinstated a form of forward guidance, stating that the Federal Reserve will be watching for “actual as well as expected progress toward its inflation goal.” The statement also underscored that future rate hikes will be glacial. The Fed lowered the trajectory for interest rates in 2017 and 2018 slightly, but held to a trajectory of four rate increases in 2016, more than we or the market expected. Note: The Fed has consistently underestimated inflation.
The more interesting issue is how the Fed expects to raise rates; it’s complicated. The levers that the Fed has to use are new and untested in the magnitude that will be necessary to raise rates. Distortions in the yield curve are likely. Traders at the trading desk of the New York Fed will be working to mitigate any distortions that arise, while we enjoy our holidays. Trading to begin raising rates begins tomorrow, so stay tuned. This is another reason for gradualism; financial markets will need time to adjust.
Bottom Line: Seven years to the day after interest rates fell to zero, we are finally leaving that mark. The question is whether we can stay off it. Yellen will do all she can to make sure the Fed doesn’t repeat the mistakes of other central banks. The Yellen Fed will move gradually and wait for overall economic activity show some signs of actual heat before doing anything aggressive on rates. We could use a warmer economy; with any luck, we may get it. Today’s rate hike is affirmation we are at least out of the deep freeze.