The Fed has been raising interest rates over the last few years based on fears of inflation that never seemed to come to pass. But, with monetary policy still very loose, and investors in a good mood pushing the stock market higher and higher (with a few days of correction last week), the rising rates seemed to have no real effect on the economy. Unfortunately, this is the way economic policy works. Nothing happens, until it does, and then you have to hope that you already got it right.
Inflation in January
The 12-month rate for wholesale inflation rose to 2.7% for January. That’s a pretty big number, and it’s the first one that actually suggests the Fed’s long feared inflation might actually be real.
Before the data came out, the markets (and the Federal Reserve’s dot plot) anticipated three rates hikes in 2018. The current rate is 1.5%, and assuming the Fed follows it’s recent history by raising rates a quarter-percent (0.25%) each time, that means that interest rates would end the year at 2.25%. That’s hardly high, historically speaking, but definately higher than anything this market has seen in a long time. Add-in the fact that the Fed is also unwinding its “off-book” monetary policy of buying bonds by letting maturing bonds roll off the books without being replaced, and you have a market that faces the first non-zero-ish monetary policy of the last decade.
But, before we get ahead of ourselves, it is important to remember that this is not yet a trend in inflation. Only the last two months have shown any actual inflationary pressure, and other than the stock market, there are few signs that the economy is thundering ahead. In fact, numerous companies have announced layoffs in the past couple of months, and while the job market remains tight, wages are not increasing, which is truly bizarre when you consider how many states are increasing their minimum wage.
Most analysts are eyeing the next jobs report. It comes out on March 8. If wages are indeed rising, and employment remains strong, then we may finally be experiencing the long expected inflation.
The irony is that this expansion, as weak as it has been, is getting long in the tooth. It might not take much to tip it back over into a recession of some size, and overly-aggressive Fed rate hikes might be just the thing to tip it.