Fed Hints at Higher Interest Rates Soon

The Federal Reserve is urging Americans to prepare for higher interest rates that will impact almost all debts, including student loans, mortgages, and credit cards.  Despite interpretations of a dovish Janet Yellen after last week’s remarks that the Federal Reserve would remain patient and pace its interest rate hikes in accordance with data, a more recent speech from the Fed is chastising investors for not preparing themselves for higher interest rates.

The Federal Reserve is urging Americans to prepare for higher interest rates that will impact almost all debts, including student loans, mortgages, and credit cards.  Despite interpretations of a dovish Janet Yellen after last week’s remarks that the Federal Reserve would remain patient and pace its interest rate hikes in accordance with data, a more recent speech from the Fed is chastising investors for not preparing themselves for higher interest rates.

“While problems could still arise, I would expect that the very slow removal of accommodation reflected in futures market pricing could prove too pessimistic,” said Eric Rosengren, head of the Federal Reserve Bank in Boston.

Rosengren noted that the United States has proven resilient in the face of weak global demand, although Yellen had noted that could be a potential risk factor for future American economic growth. “I personally expect that a stronger economy, at essentially full employment and with gradually rising inflation, will lead to more tightening than is currently priced into the futures market expectations for the next two years,” he said.

The global slowdown was a relatively minor risk that Rosengren said was overblown in markets in 2016. “Early this year, concerns reemerged about the economic health of China and Europe, which led to significant volatility in both foreign and domestic financial markets. In reaction to that volatility, federal funds rate futures fell significantly, reflecting market expectations for only a very gradual increase in short-term interest rates,” he said, adding, “The U.S. economy is continuing to improve despite the headwinds from abroad.”

While noting that he expects a “gradual pace of increases,” Rosengren’s comments also reflect a rising disconnect between the Fed and mainstream economists. Low and falling yields on the 10-year U.S. Treasury earlier this year were a result of investors becoming negative on growth rates later in 2016 as China’s weakness was expected to impact the revenues of many American companies, who have invested heavily in demand from China to offset weak growth in America.

Wages in America have actually fallen in the last 17 years as more production was moved to China. At the same time, Chinese workers have seen exponential wage growth and the trade balance between the U.S. and China.

This has also impacted the Federal Reserve’s actions, as the Fed has increasingly been influenced by foreign developments in setting monetary policy. “I would note that at the beginning of the year, problems in the domestic economies of many of the United States’ major trading partners began receiving significant attention,” Rosengren noted. “Several foreign central banks eased their monetary policy, and some financial markets became volatile. These global developments had an impact on U.S. financial markets, and many market participants began anticipating that U.S. monetary policy would be less likely to continue normalizing.”

With a slowdown in China and weak wage growth in America, the market expects a less robust pace of interest rate increases. Rosengren dismisses this, arguing that the economy is much better than average Americans—and many economists—believe it to be.