VOL. 41 | NO. 10 | Friday, March 10, 2017
Why so few are worried about likely Fed rate hike this week
WASHINGTON (AP) — For years after the Great Recession ended, investors fretted — sometimes panicked — over the prospect that the Federal Reserve might begin to raise interest rates from record lows.
Now? The Fed seems all but sure to raise rates Wednesday for the third time in 15 months and to signal more hikes probably coming. And the response from investors has been something akin to a yawn.
Wall Street appears too busy extending the stock market rally that began with President Donald Trump's election in November, cheered by the prospect of tax cuts, an easing of regulations and higher spending for infrastructure to worry about a rate hike.
Fed watchers, it seems, are more buoyed by expectations for a vigorous economy than worried about whether slightly higher rates might slow growth.
When Chair Janet Yellen and several other Fed officials separately suggested earlier this month that the economy was sturdy enough to withstand a modest raising of loan rates, investors quickly raised their estimate of the probability of a rate hike at the Fed's meeting this week from around 20 percent to 80 percent.
After Friday's robust February jobs report — 235,000 added jobs, solid pay gains and a dip in the unemployment rate to 4.7 percent — the likelihood has grown to 91 percent, according to the CME Group, which tracks investor expectations of Fed actions.
Yet no one seems very concerned.
"We're just at a different place now than in 2013 when there was a lot of angst and uncertainty about the economy's prospects," said Mark Zandi, chief economist at Moody's Analytics. "Now, the fundamentals of the economy are much better. We are close to full employment and investors feel more comfortable about where we are."
In light of Friday's jobs report, optimism about Trump's economic program and other signs that growth may pick up, some economists said they were raising their forecast for the number of rate increases this year from three to perhaps four.
"I think a March rate hike is a fait accompli," said Sung Won Sohn, an economics professor at California State University, Channel Islands, who expects four rate increases in 2017. "The more important question is: How many more hikes they will give us for the balance of the year?"
If the Fed is no longer unsettling investors with the hint of a forthcoming rate increase, it marks quite a change from the anxiety that prevailed after 2008, when the central bank cut its key rate to a record low and kept it there for seven years. During those years, any slight shift in sentiment about when the Fed might begin raising rates — a step that would lead eventually to higher loan rates for consumers and businesses — was enough to move global markets.
In 2013, then-Chairman Ben Bernanke sent markets into a panic merely by mentioning that the Fed was contemplating slowing the pace of its bond purchases, which it was using then to keep long-term borrowing rates low.
But now, the economy is widely considered sturdy enough to handle modestly higher loan rates. The unemployment rate, at 4.7 percent, is below the 4.8 percent level the Fed has deemed an indication of full employment. And inflation, which had stayed undesirably low for years, is edging near the 2 percent annual rate that the Fed views as optimal.
And while the broadest gauge of the economy's health — the gross domestic product — remains well below levels associated with a healthy economy, many analysts say they're optimistic that Trump's proposed tax cuts, infrastructure spending increases and deregulation may accelerate growth. Those proposals have lifted the confidence of business executives and offset concerns that investors might otherwise have had about the effects of Fed rate increases.
Yet for the same reason, some caution that if Trump's program fails to survive Congress intact, concerns will arise that the president's plans won't deliver much economic punch. Investors may start to fret about how steadily higher Fed rates will raise the cost of borrowing and slow spending by consumers and businesses.
The Fed typically raises rates to prevent an economy from overheating and inflation from rising too high. But throughout the Fed's history, its efforts to control inflation have sometimes gone too far — slowing borrowing and spending so much as to trigger a recession. Already, the current expansion, which officially began in June 2009, is the third-longest in the post-World War II period.
The Fed's benchmark rate, after modest increases in December 2015 and December 2016, now stands at a range of 0.5 percent to 0.75 percent, still quite low by historical standards. But if the Fed ends up raising rates three or four times this year and follows up with three additional hikes in 2018, its benchmark rate would be left at a level that might start to dampen economic activity.
"The Fed is really just normalizing rates now and not tightening credit," said David Jones, chief economist at DMJ Advisors. "But if the Fed hikes three or four times this year, by next year, the rate increases will start to bite and investors might start to worry about whether the Fed's credit tightening could get in the way of Trump's stimulus program."