What will the Fed do next?
Since the Federal Reserve’s Open Market Committee met in mid-June, the following things have happened:
- The U.K. voted unexpectedly to leave the European Union.
- Global financial markets tanked.
- Global financial markets rebounded.
- The Dow Jones Industrial Average and the S&P 500 closed at record highs.
The FOMC meets July 26-27, and then three more times in 2016—September 20-21, November 1-2, and December 13-14—to potentially resume hiking interest rates, as Fed Chair Janet Yellen and other governors have signaled they intend to do when conditions are right.
Paul Ashworth at Capital Economics predicts that “we can rule out July” for timing the next rate hike by the Fed. He believes Yellen and her colleagues will want more data on the potential global impact of Brexit before raising rates and potentially slowing economic growth.
However, Ashworth pointed out that since the first quarter of 2016, many U.S. economic indicators have turned substantially positive. Job growth and consumer spending have rebounded strongly. Oil prices have risen—good news for domestic drillers and rig-workers. The U.S. dollar has stabilized after rising sharply since mid-2014—good news for U.S. exporters.
“The economy appears to be doing pretty well,” Ashworth said. “It’s not fantastic, but certainly on a firm footing, and any concerns about recession appear to be unfounded.”
Investment strategist Anthony Valeri at LPL Financial predicts that if U.S. GDP continues to grow by 2 percent to 2.5 percent per year, inflation picks up a bit, and there aren’t any new shocks to the global economy, the Fed will hike rates this year.
“There is sort of a myth about the Fed and the election,” said Valeri, referring to a widespread belief that the Fed won’t change interest rates to influence the economy in an election year. But Valeri said, in fact, the FOMC has done that “every election year back to 1968.”
Still, Valeri thinks it most likely the Fed will hold fire in September (and certainly in November, when it meets just one week before the election), and will wait until its December meeting to act on interest rates.
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