Economic and Market Insights June 9, 2017

By Scott Colbert, CFA Chief Economist, Director of Fixed Income The Commerce Trust Company

Federal Reserve’s Perspective Is Largely “Mission Accomplished”

With a 4.3% unemployment rate and inflation moving towards or hovering around 2%, the Federal Reserve (Fed) is likely giving itself a pat on the back this month for reaching its target goals for the economy. The media widely reports that the Fed is tasked by Congress to operate under a so-called “dual mandate,” which directs the board “to promote effectively the goals of maximum employment and stable prices.” There is a third mandate, rarely mentioned, which calls for “moderate long-term interest rates” as well. All considered, the legislature provides the Fed with a simple roadmap. Despite these three often contradictory objectives, the Fed could reasonably argue it has hit the bull’s-eye, perhaps like never before. And because of its success with the hard data, most market experts believe that the next quarter-point interest rate is a foregone conclusion at the Fed’s June 13-14 Federal Open Market Committee meeting. Well….unemployment is at a 16-year low. And hourly wages are growing consistently at an annualized pace of 2.5% or better. With unemployment low, wages will typically rise even further, and rising wages generally lead to a bit more inflation. And let’s face it, a sub-1% short-term interest rate and a 3% 30-year-Treasury rate is rather obviously a very favorable interest rate environment. So the Fed wants to gradually reduce what it considers exceptionally accommodative monetary policy while it can and pre-empt a material overshoot of either inflation or employment or interest rates down the road. So why raise rates when everything is coming up roses?

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