Fed Graph Of Future Fed Funds Rate Only Hurts Their Credibility

Sometimes you really have to wonder what is going on at the Fed. They recently released their projections for the Fed Funds rate all the way out until the fourth quarter of 2018:

As you can see, they have 70% confidence that the Fed Funds rate will be somewhere between slightly more than zero and slightly less than 5%, with their median path ending up at around 2.5%. Seriously, does anybody in their right mind think the Fed Funds rate will be anywhere close to 5% just 9 quarters from now! In fact, I would venture to say that even the rate of 2.5% is highly optimistic. The Fed has been overly optimistic about rates for years now and I’m afraid this graph will do nothing to enhance their credibility.

The August unemployment report comes out this Friday and some on the Fed are pushing for a September rate hike if those numbers are strong. I know the general consensus is that the anemic growth in the first two quarters of this year were due to drawing down inventories and that restocking those inventories along with robust job numbers indicate much stronger growth in the last half of this year. Well, let’s actually see it before we act. In addition, the positive wage growth we’ve seen in the last year is primarily due to exceptionally low inflation rather than spectacular wage increases. It is unfathomable that the Fed does not understand that, while you may have to be ahead of the curve when interest rates are at 4 or 5 percent, you need to make sure you are slightly behind the curve when you are at the zero bound. Another rate hike that kills the economy like the one in December last year and the Fed will have lost all credibility.