Harper: As Anticipated, Fed Raises Interest Rates

Dec 15, 2016

In this week’s Economic Report, Dr. Rick Harper discusses the Fed’s recent rate hike and projections of three more hikes in the coming year. He also talks about what the hike means for consumers.

Credit Michael Spooneybarger/ CREO

“It (the rate hike) was long anticipated. In fact, as this segment airs, it’s been a year and a day since the Fed raised interest rates. It was not cataclysmic in the markets. It was well-anticipated, of course. So we saw what was really expected. Bond yields have continued to rise over the past couple of weeks so that the 10-year Treasury is now tracking well above where it was after its   historic lows in early to mid-summer of this year.”

“And then the stock market: The Dow is poised to hit a historic high, and the other indexes are tracking in a similar fashion. They’re up strongly. That’s all about anticipation of more aggressive fiscal policy.”

“We don’t know what monetary policy will be like when Chair Yellen’s term ends a year from now, but the betting is that over the next year we’ll see some interest rate increases and we’ll also see under the new government coming in, we’ll see substantial borrowing in order to finance whether it’s tax cuts or infrastructure spending that tends to put upward pressure on interest rates. And it’s an indicator that there will be more aggregate demand out there in the economy driving business at factories, service producers and employment as well.”

Harper said the forecast for three more rate hikes in the coming year is entirely reasonable.

“We just haven’t been getting the growth the Fed has predicting. They have been underestimating growth consistently now in every forecast that they do for six or eight years. That means that when they issue their growth forecast and when markets absorb that normally, if we were to get the growth forecast by the Fed, that would call for a rate increase, however we just haven’t been getting it.

“When we talked about rate increases 14 months ago, I said that there would have been three probably in 2016, but there weren’t. It’s because growth came in weaker than expected. It looks like we are going to finish 2016 with a GDP growth rate after inflation of just about 2 percent. And so when you consider that almost 1 percent out of those 2 percent is due to population growth, that means there is just not enough GDP growth to keep businesses investing in productive capacity. If demand to your firm is only going up 1 or 2 percent a year, then you can probably handle that just through productivity increases, making your existing workers more productive with better computer equipment, better software, better supply chain logistics. You don’t need to go out and build that new factory, which would be the thing that would really send investment spending on its way up.”

Harper said the rate hike won’t have much effect on consumers for the short term unless they are in the market for a car or a home.

“Those are the things that people buy on credit. It’s clear that those rates will be tending upward rather than tending downward as they have been for the last year or so. However we are also seeing … some upward pressure in wholesale prices. Those are the things that the Fed is looking at to say that the economy is stable enough to raise interest rates more during the coming year to get us back on a more normal trajectory.”

Florida economists met this week to talk about expected growth and possible budget constraints.

“There are two pieces of good news from the Legislature. One is that the revenue estimating conference met and upped their estimate of what general revenue, the single largest fund that is mostly funded by sales taxes, would be, which means that law makers might not have to make some of the painful choices that await them.”

“The other good thing that happened was that House Speaker Richard Corcoran released his committee assignments and committee structures. He actually will have an oversight committee for Triumph Gulf Coast for that 300 million dollars in funding, which has been received in the state treasury but has yet to be appropriated. That committee is tasked with making sure that the spending occurs on appropriate projects, primarily education and infrastructure, and that it occurs in the eight Northwest Florida counties."

Harper notes that the panel is chaired by Rep. Jay Trumbull from Panama City, with Rep. Clay Ingram of Pensacola serving as vice-chair. 

"So overall good news on the Triumph Gulf Coast funding front,” Harper said.

Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at rharper@uwf.com. CREO staff writer Brandy Hilboldt Allport contributed to this report. She can be reached at ballport@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity