Forecasts Revised for US Interest Rate Hikes

By Robert Wenzel

I have warned that this would happen in the EPJ Daily Alert. On May 19, I reported:

[P]rice inflation is starting to accelerate and will put significant long-term pressure on rates. Further, the desire to hold cash balances is declining which will add to upward pressure on rates. As the price inflation becomes more obvious, the Fed will start to push rates higher, much sooner than most expect. But the rate push will be too little too late. This will ultimately result in a multi-year ratchet up in rates.

FT reports:

Some of the highest profile – and most dovish – analysts have shifted their forecast for when rates rise from near zero. Jan Hatzius of Goldman Sachs moved his prediction from the first quarter of 2016 to the third quarter of 2015 in the wake of the jobs report.

Michael Feroli of JPMorgan shifted his forecast from the fourth quarter of 2015 to the third quarter. “Basically, we pulled forward our call because the unemployment rate fell faster than expected,” said Mr Feroli. “Secondly, the inflation numbers have been a little higher.

“Despite the striking weakness in the Q1 GDP report, we remain quite confident that the US economy is accelerating to an above-trend pace,” said Mr Hatzius. “In response to the cumulative changes in the job market, inflation, and financial conditions . . . we are pulling forward our forecast for the first hike.”

I expect the rate hikes to start even sooner. However, the hikes will come in the face of accelerating price inflation and will be too small to stop the price inflation acceleration. It is very likely to be a tiger by the tail situation with price inflation acceleration followed by too timid of a rate hike followed by more price inflation acceleration followed by another round of too timid of rate hikes.

Of course, the Fed shouldn't be manipulating interest rates and the money supply at all, but the manipulation they will be conducting will make a bad situation worse.

They have no clue about the price inflation that is developing. Today, for example, Market Watch reported:

One of the Federal Reserve’s leading doves downplayed recent higher readings on inflation on Tuesday, saying he expects the price level to stay below the central bank’s target for several more years, possibly even until 2018.While inflation has climbed over the past three months and is now up 1.8% over the past year, “many large fluctuations in [the personal consumption expenditure index] inflation end up being purely transitory,” said Narayana Kocherlakota, the president of the Minneapolis Fed, in a speech to the Minnesota Business Partnership.

“I currently see the probability of inflation’s averaging more than 2% over the next four years as being considerably lower than the probability of inflation’s averaging less than 2% over the next four years,” he said.

The inflationists at the Fed, which include Kocherlakota, Fed vice-chair Stanley Fischer and Fed chair Janet Yellen, will not become concerned about inflation until it is clearly over 3%, at that point they will be too slow in hiking rates to the level required to snuff out the inflation and the price inflation climb above 3% will surprise most.  

Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.