A Rare Team up of Economists with the Federal Reserve's Outlooks


Wall Street is nearly certain that the Fed will raise interest rates to 0.75 percent on Wednesday, according to futures markets that predict the direction of the rate. But with Donald Trump's election victory, the Times said, companies in manufacturing and other industries "have become more confident about the outlook since late past year, at least in part because of hopes that tax cuts and other favorable policies will be coming from the new Trump administration and his party that controls Congress". So what is the likely impact on the United States and the global economy? After all, the Fed is expected to raise by just 0.25% on Wednesday.

Toms thinks that the Fed will raise rates three times this year and could do so another three times in 2018. The Fed is seen as virtually certain to hike the Fed-funds rate by a quarter of a percentage point.

Retail sector employment was weakest of all sectors with 26,000 jobs lost in the month, the biggest decline since December 2012, after a gain of 39,900 jobs in January. The downside, though, is that if higher interest rates are accompanied by inflation, cash alternatives may not be able to keep pace with rising prices.

And the 10-year TIPS breakeven rate, another measure of inflation expectations tracked by the Fed, last month reached its highest levels since September 2014. By raising rates, it will appear to do both. Yet the overall economic growth, and the growth in the demand for capital, and the growth in demand for consumer loans, were all less than desirable. Either path likely pushes yields even higher well before a final decision is made as investors begin to anticipate this Fed transition towards normalized policy.

The Fed will release a statement on Wednesday, along with new economic projections (http://www.marketwatch.com/story/fed-expected-to-send-hawkish-signals-with-the-dot-plot-2017-03-10), at 2 p.m. How might the markets react? Rising inflation in the United Kingdom and a weak yen may stir committee members into action at some point, but neither central bank is expected to surprise this time. This rise was heavily trailed in recent weeks and has been priced in as a certainty by market participants in New York, London and Tokyo - though some would be surprised by a half-point rise.

"When rates rise, entrepreneurs relying on credit or relying on customers [who rely] on credit may face additional headwinds", he said.

Why do the bond markets matter? "We're creating more jobs, we're expanding, and it isn't being coupled with inflation".

"You don't need any intrigue or fundamental shifts in beliefs about the economy to realize why a rate increase might be likely", Johns Hopkins University professor and former Fed adviser Jon Faust said of the central bank's plans. But that may not matter for the immediate market reaction, which will hinge on how the Fed sees the future, not the future itself.

Many think the USA stock market is due for a retreat, but opinions differ on whether the rate rise will be enough to burst the market's exuberance. The euro fell to $1.0639 from $1.0660, and the dollar dipped to 114.72 Japanese yen from 114.77 yen. Like lowering interest rates, QE essentially expands the money supply and aims to incentivize more lending by banks, in turn encouraging more spending by consumers and businesses. Trump can only complain about the currency, but he could make good on threats to impose tariffs on Chinese goods, sparking a trade war. For example, the U-6 unemployment rate is less encouraging. At an annual rate of 2.8 per cent, "while.wage growth.is nothing to cheer about, it is not bad either". This might seem like a healthy rate, but it is the slowest recovery from recession since the second world war.

Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers.



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