CPI Data Indicates Another Fed Rate Hike

For The Fed, Looking Like A Two-Fer

It looks like we are definitely going to get two rate hikes this year. Three or four? We won’t know until the second half. But with the latest CPI data showing inflation at 2.5%, and a fairly solid job market as measured by the unemployment rate at least, a March rate hike is looking more realistic. The betting odds are still against it. That will change if the economy stays at status quo. Fed chairwoman Janet Yellen’s comments last week reminded us that “waiting too long to remove accommodation would be unwise”. What is debatable is whether the expiry of the U.S. debt ceiling, which coincides with the next FOMC meeting in mid-March, would deter the FOMC from moving on rates, says Neil MacKinnon, an economist with VTB Capital in London. “It seems that there is a broad consensus at the Fed to implement another rate hike, given that the Fed’s dual mandates of price stability and maximum employment are acknowledged as having been met,” he says. Recent economic indicators here continue to show stable growth. Fund managers are of the mind that corporate earnings are looking good. Hardly a week goes by without the DJIA breaking a record. Investors will have to pay closer attention to valuations, which Florida-research firm ValuEngine said were stretched and overpriced by an average of 20% based on their proprietary pricing models. Some economic data points: household debt rose to $460 billion in 2016, the biggest annual increase in a decade. Household debt is just 0.8% below its peak of $12.7 trillion hit in the third quarter of 2008. Remember what the fourth quarter of 2008 looked like? Bank lending, meanwhile, is starting to slow down after a period of 10% growth for commercial and industrial loans made by commercial lenders, though larger companies have been raising funds through bond issuance instead. For now, we know the Fed is still looking at three rate hikes this year of 25 basis points each. Anything more than this would require evidence of an unexpected surge in inflation. Fed officials have expressed concern that plans for reflation bring with it an inflation risk that will force rates higher. How high? The Fed’s long term interest rate projection is still 3%.