The minutes from the May meeting from the Federal Reserve show that it’s set to continue raising interest rates this year. But a slowdown in the economy could deter the Federal Open Market Committee’s (FOMC’s) plan lest the economy is not yet ready.
According to CNBC, “Substantially lower-than-expected inflation would be a significant hurdle for the central bank in its quest to normalize a benchmark rate kept near zero through much of the post-financial crisis economy. The Fed has hiked the rate three times since December 2015 and economists and Wall Street strategists widely expect at least two more moves before the end of 2017.However, the inflation numbers of late have not been cooperating. The Fed’s preferred measure, the personal consumption expenditures index, is showing gains of just 1.8 percent currently, excluding food and energy, and expected to fall even further. The consumer price index, which is a secondary measure in Fed officials’ eyes, most recently showed a 1.9 percent gain for core and 2.2 percent on the headline.”
As expected the FOMC left its benchmark interest rate unchanged in May. But many economists are anticipating the Fed to hike at the June meeting. A report also indicate that the FOMC has written off the recent weak economic numbers as transitory. This means the numbers are dismissed and overlooked because they don’t meet the Fed’s economic expectations. Soft consumer spending and inventory investment was reasons for slow down according to Fed staff members. Lenore Hawkins, co-author of Cocktail Investing, says the first thing the Fed really wants to do is to get back to normalized rates. That’s the priority rather than slowing down the economy. The challenge with raising rates is that it does increase borrowing costs which is great for savers but not so good for borrowers.
We now have total household debt levels are above where they were at the peak of 2007. This may hurt consumer spending. As those interest rates rise the cost for families to pay the debt that they have is going to increase which means they will have less money to spend.
According to Hawkins, “the wage growth has been pretty much non-existent since the financial crisis of 2008. Median household income today is still well below where it was at the peak in 1999. So we’re nearly 18 years later and household incomes have not really grown at all. We’re not really seeing the kind of wage pressure that you would expect when you see unemployment as low as it is. Part of that is because the unemployment rate is not telling us the full story. The labor participation rate is still very low. The last time it was at this level was about 30 years ago. This kind of accounts for some of the lack of wage pressure. Families aren’t earning a whole lot and wages haven’t grown much. Household debt is back up above at the peak of 2007. Where are they going to spend? The only way you can increase spending is to make more money or borrow more. Credit card delinquencies have now been rising for the past 2 quarters. Auto loan delinquencies have been rising consistently for the past 2 years. The total loan issuance in the first quarter declined for the first time in four years. People aren’t making more and they’re not borrowing more so where is the spending going to come from?”
The Fed appears to be in a dilemma. If the data for the U.S. economy continues to come in at below expectations in the near future, then the FOMC may choose to keep rates where they are for longer, possibly only raising them in 2018.