Friday’s employment report was so strong that everyone came to the same conclusion at the same time: The FOMC will most likely start hiking the federal funds rate at the June 16-17 meeting of the monetary policy committee. Wage increases remain subdued, and lower than Fed officials would like to see. However, the recent impressive payroll employment gains are reminiscent of the good old days of the Old Normal economy. It’s hard to imagine the Fed coming up with any more credible excuses for not moving forward with monetary normalization given that the labor market has been moving back to normal so fast in recent months.
The question is whether the first rate hike will be followed by additional ones this year or whether one-and-done is still the most likely scenario for 2015, as Debbie and I have been thinking. It all depends on the strength of the dollar. With the Fed moving to tighten monetary policy while the other major central banks are moving in the other direction, the dollar should continue to soar. The trade-weighted dollar has had a vertical ascent, rising 14% since July 1, 2014. It could rise by another 10% in the one-and-done scenario.
That could push the US inflation rate further below the Fed’s 2% target. It could also depress US exports and boost US imports. So the trade deficit would weigh on real GDP growth, as it did during Q4-2014. The Fed might be satisfied with one rate hike at mid-year in this scenario, and then remain patient about further increases until next year.
In any event, Fed Chair Janet Yellen will spin it all together for us in her semi-annual congressional testimony on monetary policy scheduled for February 24 before the Senate Banking Committee and the next day before the House Financial Services Committee. She’ll probably say that employment gains are so strong that she and most of the other members of the FOMC anticipate that price and wage inflation should rise later this year closer to the Fed’s targets.
She is likely to say that the Fed remains “patient” about raising rates, but less so now than when the word first appeared in the January 28 FOMC statement. That would imply that the word could be dropped even from the next statement on March 18, and almost certainly from the April 29 statement. Then the June 17 statement should announce that the game of hiking rates has begun.
The question is whether the first rate hike will be followed by additional ones this year or whether one-and-done is still the most likely scenario for 2015, as Debbie and I have been thinking. It all depends on the strength of the dollar. With the Fed moving to tighten monetary policy while the other major central banks are moving in the other direction, the dollar should continue to soar. The trade-weighted dollar has had a vertical ascent, rising 14% since July 1, 2014. It could rise by another 10% in the one-and-done scenario.
That could push the US inflation rate further below the Fed’s 2% target. It could also depress US exports and boost US imports. So the trade deficit would weigh on real GDP growth, as it did during Q4-2014. The Fed might be satisfied with one rate hike at mid-year in this scenario, and then remain patient about further increases until next year.
In any event, Fed Chair Janet Yellen will spin it all together for us in her semi-annual congressional testimony on monetary policy scheduled for February 24 before the Senate Banking Committee and the next day before the House Financial Services Committee. She’ll probably say that employment gains are so strong that she and most of the other members of the FOMC anticipate that price and wage inflation should rise later this year closer to the Fed’s targets.
She is likely to say that the Fed remains “patient” about raising rates, but less so now than when the word first appeared in the January 28 FOMC statement. That would imply that the word could be dropped even from the next statement on March 18, and almost certainly from the April 29 statement. Then the June 17 statement should announce that the game of hiking rates has begun.
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