Fed Raises Rates Despite Data
Motivated by Desire to Rebuild Monetary Policy Tool Kit
As expected, the Federal Reserve opted to raise interest rates 25 basis points yesterday, from 1.00 percent to 1.25 percent. This is the second increase in 2017 and the third in the past seven months.
On the heels of additional soft inflation data released this week, the Fed’s decision to move forward with a second-round increase this year appears to be motivated by both a push from the market with today’s rate hike fully priced in, according to Bloomberg, as well as a desire to rebuild the monetary policy tool kit.
Justification from the data, on the other hand, as the economy shows lingering signs of weakness carrying over from the first-quarter amid still-sluggish consumer activity, modest labor market gains, and cooling inflation, appears to be the missing component that would normally be at the forefront of an accelerated rate path. In other words, the Fed’s decision to raise rates today, while expected, appears to be little motivated by the data, leaving the future pathway for rates even more uncertain at this point.
Acknowledgement of the recent decline in prices within the statement as well as with a modest downward revision to the forecast, appears to be taking a backseat to the Fed’s general optimism for improvement in growth and inflation. Without sizable and clear additional weakness, the Fed appears steadfast in its commitment to one additional rate hike this year. Once again, the Fed’s credibility is on the line as the data argues for quite an opposite position.
Lindsey Piegza, PhD, is chief economist at Stifel Fixed Income.
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