Is the Fed Confused?

lance_HSTomorrow the Fed will decide whether or not to hike rates again.

Remember, the Fed gave us a nice holiday gift when they last met in December. After months and months of talk, they finally acted to raise the federal funds rate by a quarter point.

After the decision, Fed Chair Janet Yellen held a press conference and basically stated the time was right to start normalizing policy. And the market even moved higher after they raised rates, at least until the end of the year.

Now, we’re facing a market meltdown in the U.S., European stocks aren’t looking so great, and China’s market has plunged even further into chaos. It’s a good thing the Fed didn’t wait again!

Every other Fed meeting the chair gives a statement and takes questions from the press. The Fed also updates their projections for the economy, jobs, inflation and appropriate interest rate policy.

I didn’t really find anything surprising about Yellen’s comments or answers. I did, however, find the updated projections very interesting.

The Fed projected that gross domestic product (GDP) will actually fall. They expect it to hit around 2% by 2018 and stay there, down from the 2.4% projected for 2016.

They predict the unemployment rate will hold steady. According to them, it’ll run between 5% now and 4.7% in the next couple years to about 4.9% in the longer run (good luck with that).

And they slightly reduced their main inflation measure. It’s down at 1.3% now, and they expect it to hit their target of 2% by 2018 or longer.

Remember, 2% was the target they thought they would achieve with zero interest rates and QE!

So, despite their projection that the economy will contract in the next few years and inflation won’t hit their target for at least a couple years, they expect to hike the federal funds rate by a full percent this year, another full percent in 2017 and slightly below a full percent in 2018!

I’m sorry, but I don’t get it. How do the hundreds of PhD’s working for the Fed figure that a slowing economy with little inflation will require more interest rate hikes?

Apparently I’m not the only one confused by the projected Fed policy. According to Bloomberg News, Goldman Sachs says it’s time to sell U.S. Treasury bonds while Morgan Stanley analysts predict a rally.

Lance Gaitan

Editor, Treasury Profits Accelerator