SMITH BRAIN TRUST - While the Federal Reserve is expected to forego an interest rate increase, but “keep options open,” such a hike should not be avoided and can be better adapted to if the Fed projects it for this summer and announces it now, says economist and longtime Fed watcher Peter Morici at the University of Maryland’s Robert H. Smith School of Business.
At the least, the Fed and chair Janet Yellen through their two-day meeting concluding tomorrow (April 26, 2016) "should strongly signal [they're] prepared to raise interest rates a quarter point in June and another quarter point later in the year,” Morici told Wall Street Journal Radio.
“Financial markets never like surprises… So now, [the Fed] has to telegraph its moves to establish expectations for a rate increase so that when it happens, it doesn’t cause great disturbance,” Morici says.
The Fed historically not liking to raise interest rates during the Labor Day-through-November Presidential campaign further factors in, says Morici. Thus, a hike will need to start in June or July. Otherwise, “markets will think this can be postponed forever.”
However, “many Fed officials remain spooked by the steep stock market drop earlier this year and by weak first-quarter U.S. economic data,” reports Reuters. “Concrete signs of higher inflation and growth may be needed before the FOMC, the Fed's policy committee, continues with the projected gradual path toward more normal levels of interest rates.”
In a concurrent op-ed, Morici says: “Gasoline prices have already started to rise — up about 40 cents a gallon since mid-February — and higher petroleum prices generally will filter thorough to cost structures in chemicals and other basic materials, airlines and other service activities. If that keeps up, overall consumer prices will rise at more than the Fed's target of 2 percent a year, and inflation could easily spring out of control.”
He concludes: “Overall the Fed, by keeping interest rates near zero for nearly 8 years, has done all it can to stimulate economic recovery, and normalizing rates by gradually raising the benchmark federal funds rate is the best policy course.”