October 1, 2018 — Fed Raises Rates by 25 bps, What Happens Next?

OCTOBER 1, 2018 – FED RAISES RATES BY 25 BPS, WHAT HAPPENS NEXT?

As expected, the Fed, unanimously, raised rates a quarter of a percentage point last week; its eighth move since 2015; to the 2.0 to 2.2 percent range.  The question now remains: Where will rates go in 2019?  Fed Chair Jerome Powell said he will follow three factors to indicate whether the economy is running out of steam: job growth slowdown, a sharp increase in wages or inflation and a slowdown in headline growth.

Economists theorize the Fed has two options: (1) As long as unemployment keeps falling below the level they project consistent with stable prices, Fed will need to raise rates to stall overheating.  This would be standard Fed practice at this point in an expansion; or, (2) With inflation is not going above 2% and the Fed could stop raising after reaching a neutral setting that won’t spur nor hinder growth. This would be a complete departure from the norm.   Powell hasn’t said which he favors.

Under the current projections, the Fed funds rate should be around 3 percent by 2020. If a recession arises, rates will not be high enough to be cut to stimulate the economy.

 

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