To almost no one’s surprise, the Fed voted not to raise its key short-term interest rate in June. While a number of Fed officials were vocal about raising the rate, the very disappointing May unemployment report on June 3, which showed the economy produced only 38,000 new jobs last month versus a projected 160,000, dashed any hope of raising the Fed Funds rate in June.
The surprise was that the decision was unanimous among the 10 voting members of the Fed Open Market Committee (FOMC). Also surprising was the fact that six of the 10 voting members called for only one rate hike this year instead of two.
More members have decided that the U.S. economy is simply not strong enough for two rate hikes this year. Now, many Fed watchers are questioning whether there will be even one rate hike in 2016. The Fed Funds futures market now sees only a 38% chance of a rate hike in September and a 56% chance in December.
As I suggested last week, several FOMC members, including Chair Janet Yellen, wanted to see the outcome of Great Britain’s “Brexit” vote on whether to leave the European Union on Thursday. With regard to the Brexit vote, Yellen said in her post-meeting press conference:
“It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of [interest rate] policy.”
Obviously, Yellen and her colleagues continued to wrestle with conflicting U.S. economic data over recent weeks as they pondered when next to lift the Federal Funds rate. The Committee first raised the benchmark rate back in December, ending seven years at virtually zero.
The Fed’s on-again, off-again position on raising the Fed Funds rate a second time has led to confusion among investors and a growing belief that the Fed lacks a clear vision of upcoming policy direction.
Fed’s Economic Predictions Once Again Too Optimistic
At her press conference in June, Janet Yellen’s statements, combined with economic projections from individual FOMC members, showed that the Fed Chair and her colleagues are rethinking their belief that the U.S. economy will soon return to normal.
For years, Fed projections for U.S. economic growth have been overly optimistic, with repeated predictions that the American economy would fairly quickly return to the sort of robust growth it was used to before the Great Recession of late 2007-early 2009.
Those projections never came true, and Fed economists have repeatedly revised down their projections of where growth and interest rates will be in the future. For example, the Fed revised down its estimate of the Fed Funds rate for 2017 from 1.9% to 1.6%, and for 2018 from 3.0% to only 2.4%.
These continued downward revisions reflect the growing reality at the Fed that this economy is not going to return to “normal” growth levels of 3% or better anytime soon. Perhaps this explains why more members of the Fed policy committee are backing away from multiple rate increases this year.
Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com