Federal Reserve Hikes by 0.25%...
Let’s hope the Fed got it right.
The Fed raised its key interest rate by 0.25% this week, signaling confidence in an improving economy.
It was the second time in 10 years the Fed has raised rates. The first came with disastrous results last December 2015. While the rate hike signifies we no longer need the Fed’s crutches, that’s not exactly the case.
The Fed believes unemployment is now at 4.6% form 4.9%.
Unfortunately, 95 million Americans,now off the labor participation rate, would disagree. Once we look at the U-6 –instead of the relied upon U-3- we can easily see true unemployment is closer to 10% than 4.6%.
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With another 446,000 Americans leaving the labor force in November, and a great deal of newly added temp and part-time workers, 4.6% is a distant hope.
The Fed believes GDP is strong after averaging 1% to 1.5% growth in multiple quarters.
That’s not strength. And the only reason we saw 3.2% in Q3 2016 was because of soybean exports, contributions to healthcare, and $12.6 billion in business inventories.
Unfortunately, once we net out those contributions to GDP, it’s not as impressive.
Still, the Fed believes 2016 GDP growth of 1.9% with 2.1% growth in 2017, which is a possibility once the new Administration, delivers. Should we see substantial spending plans, it could spark demand, which could spark inflationary threats.
The Fed also believes inflation will rally to 1.9%. At the moment, though inflation has been stuck at 1.6% since March 2016, nowhere near the Fed’s earlier healthy target of 2%.
Here’s hoping the Fed made the right call.
As for 2017 rate hikes, the Fed expects to increase rates three times to a rate of 1.4% by the close of the year. We can only hope the Fed made the right call here.
Let’s just hope the market doesn’t flop here with the latest news being priced in. There’s a lot of speculative money on the line. The last thing we want to see is a mass exit.