Fed Raises Interest Rates 1/4 Point

The Fed raised interest rates one quarter of a point today, to a range of 1/2 to 3/4 percent. So, after a year spent desperately trying to raise rates and consistently being thwarted by political or economic news, the Fed finally got in a 2016 rate hike. The hike was fairly aggressive at 1/4 basis points as the minimal incremental is 1/8. Again, the FOMC members all seem to be prepared for an aggressive series of rate hikes in 2017. And, again, I fear they are likely to be disappointed and thwarted. Interestingly, the GDP forecasts extending out until 2019 show growth maxing out next year at 2.3% before falling again in 2018 and 2019. That hardly seems like an runaway economy. Even the Fed’s inflation projections barely climb above their 2% target and that doesn’t occur until 2019. Remember that the 2% rate is supposed to be a target, not a hard ceiling. Somehow, however, this leads the Fed to thinking that a consistent, slow-growth economy with below average inflation is going to need round upon round of rate hikes. In any case, the next rate hike will not occur until March at the earliest and probably not even then. The Fed will need time to digest what Trump’s proposals will actually look like and what kind of effect they will have on the economy. It is doubtful that Trump and Congress will have provided the details needed by then and, even if they have, whether the Fed will have time to fully analyze their effect. Remember, too, that the GOP and Trump will have no restraint in criticizing the Fed mercilessly if they believe these rate hikes are going to slow down the economy. In fact, I wouldn’t doubt that the Fed’s sensitivity to that kind of criticism, which they know is coming, accounted for the aggressive 1/4 point hike today.