What led Fed to bump up rate-hike forecast?
The Federal Reserve tossed some cold water on the recent market rally a few weeks ago when it not only raised interest rates as expected but forecast three rate hikes in 2017 instead of the two moves anticipated. Fed meeting minutes out this week are likely to shine more light on what Fed policymakers were thinking. The week’s economic news also spotlights the final jobs report of the year and measures of manufacturing and service-sector activity.
Manufacturers have endured a rough couple of years as a result of the oil downturn and sluggish exports – a byproduct of a strong dollar and weak global economy. But oil prices rebounded partly in 2016, prompting crude producers to reopen shuttered wells and order more steel pipes. And the dollar had stabilized until a recent upturn. Also, inventories are depleted after businesses reined in stockpiling in 2016, leaving them poised to ramp up orders, says Stuart Hoffman, chief economist of PNC Financial Services Group. Yet the greenback has strengthened again, raising concerns about exports in coming months. And automakers appear set to trim production early in 2017 to offset high output recently, Hoffman says. Economists surveyed by Action Economics estimate ISM’s manufacturing index, out Tuesday, will signal a slightly faster but still moderate expansion in December.
On Wednesday, the Fed releases minutes of its December 13-14 meeting, which featured its first rate hike in a year. Fed Chair Janet Yellen told reporters that President-elect Donald Trump’s proposal to beef up infrastructure spending and cut taxes “may have been a factor” in policymakers’ median forecast of three rate increases next year, up from two in their previous estimate. The plan could stoke faster inflation that the Fed is likely to temper by raising borrowing costs. Yellen also cited the unemployment rate, which fell sharply from 4.9% to 4.6% in November and could auger bigger wage and price increases. The minutes should provide a more detailed look at the debate among Fed officials and their reasons for stepping up their rate hike predictions.
The service sector, which comprises 80% of the economy, has been on a roll, partly because of robust consumer spending growth. Economists reckon ISM will report Thursday that its index of non-manufacturing activity dipped in December but remained in healthy expansion mode.
Average monthly job growth has slowed to 180,000 this year from 229,000 in 2015, largely because the low unemployment rate reflects a smaller pool of available workers. Economists believe that trend continued in December, with Labor on Friday reporting 175,000 payroll gains. They estimate the unemployment rate ticked up to 4.7% as more Americans returned to a favorable labor market, offsetting a drop in the labor force the previous month.