Posted by: John S Kiernan

Federal Reserve rate hikes can send shockwaves through stock markets and put many people to sleep. But just because the nitty-gritty of the country’s fiscal policy isn’t exciting to most does not mean we’re unaffected.

For one thing, the Fed’s five rate hikes since Dec. 2015 have cost credit card users an extra $6.8 billion in interest to date. That figure will swell by at least $1.6 billion this year if the Fed raises its target rate in March, as expected. And even more rate hikes are projected for the final three quarters of 2018.

The rising cost of debt puts a lot of pressure on consumers, who now owe more than $1 trillion to credit card companies for the first time ever. For example, it will take the average person in Magnolia, TX nearly 13 years to pay off his or her balance. With that in mind, WalletHub also conducted a nationally representative survey to gauge public sentiment. And while most people still have some homework to do, we’ve got no shortage of opinions.

Below, you can find everything you need to know about Federal Reserve interest rate increases. This includes the odds of a March 2018 rate hike and what that would mean for your wallet, plus insights from regular Americans and experts alike.

Fed Rate Hike Odds & Predictions

Most signs point to the Federal Reserve increasing its target rate in March 2018. Below, you can see what the latest research as well as experts consulted by WalletHub say will happen.

    Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/48053/auto-columnchart3.html" width="780" height="450" frameBorder="0" scrolling="no"></iframe> <div style="width:780px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2GzS3wn>Source: CME Group

Fed Rate Hike Impact by Loan Type

Interest rates on financial products, from credit cards to car loans and mortgages, are generally based on some sort of benchmark rate, which in turn is influenced by the Federal Reserve’s target interest rate in one way or another. So when the Fed’s target rises, the interest rates consumers pay, and the overall cost of borrowing do too. Unfortunately, the rates we earn on deposit accounts aren’t nearly as quick to react.

Below, you can see how Fed interest rate increases have impacted consumers’ finances in the past as well as how much we can expect a March 2018 rate hike to cost us.Credit Cards: The vast majority of credit card rates are variable, tied to the Prime Rate. As a result, we expect to see credit card rates rise the same amount as the Fed’s target.

• Another 25-basis point increase will cost credit card users roughly $1.6 billion in extra finance charges during 2018.
• When you factor in the five previous rate hikes, credit card users will wind up paying around $8.4 billion more in 2018 than they would have otherwise.

Mortgages: Mortgage rates are very difficult to predict because they are longer-term borrowing vehicles with fixed rates. If recent rate hikes are any indication, we won’t see much of a change following a March rate hike, as the mortgage markets have already accounted for the move. However, that is not to say that Fed rate hikes don’t make mortgages more expensive for new borrowers, and WalletHub’s analysts estimate that this rate hike has increased the cost of mortgages by 7 basis points.

• If you assume that the 71-basis point rise in the average APR on a 30-year fixed-rate mortgage between January 2015 and March 2018 is solely due to the five Fed rate hikes that have occurred since then, as well as the upcoming ones, then the Fed has cost the average homebuyer roughly $22,000.

Auto Loans:

• WalletHub expects the average APR on a 48-month new car loan to rise by around 15 basis points in the month following the Fed’s next 25-basis point rate hike.
• The average APR on a 48-month new car loan rose from 4.00% in November 2015 to 4.81% in November 2017 (the most recent data available). That’s an 81-basis point increase in a period characterized by 125 basis points in Fed rate hikes and record auto sales.

Deposit Accounts:

• WalletHub expects little, if any, change in the APYs available from deposit accounts following the Fed’s next rate hike. Yields on some types of accounts may even fall temporarily.
• Online savings account yields have increased by just 25 basis points on average since December 2015, despite 125-basis points in Fed hikes since then (not including March 2018). Banks seem quick to pass higher rates to consumers on loans, but are not sharing the love on the deposit front.

    Embed on your website<iframe src="//d2e70e9yced57e.cloudfront.net/wallethub/embed/48053/auto-columnchart2.html" width="780" height="450" frameBorder="0" scrolling="no"></iframe> <div style="width:780px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2GzS3wn>  

Ask The Experts: Fed Forecasting

To gain a deeper understanding of everything that makes Federal Reserve rate hikes so important, we asked the following questions to a panel of experts. You can check out their bios and responses below.

1. Should the Fed be increasing rates or not for 2018? Yes or no? Why?
2. How many Fed rate hikes do you believe there will be in 2018? Why?
3. Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?
4. How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

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• Lian An Professor of Economics in the Business School at the University of Miami
• Alan Green Associate Professor and Department Chair of Economics and Global Development Program Coordinator at Stetson University
• David L. Kelly Professor of Economics in the Business School at the University of Miami
• Beth Wilson Professor in the Department of Economics at Humboldt State University
• Ky Yuhn Associate Professor of Economics in the College of Business at Florida Atlantic University
• William Seyfried Professor of Economics and Associate Dean for Academics at Rollins College
• John T. Harvey Professor of Economics in the AddRan College of Liberal Art at Texas Christian University
• Alexander William Salter Comparative Economics Research Fellow at the Free Market Institute and Assistant Professor of Economics in the Jerry S. Rawls College of Business Administration at Texas Tech University
• Richard J. Cebula Professor of Finance and Walker/Wells Fargo Endowed Chair in Finance in the Davis College of Business at Jacksonville University
• Alex C. Hsu Assistant Professor of Finance in the Scheller College of Business at Georgia Institute of Technology
• Albert Williams Assistant Professor of Finance and Economics in the H. Wayne Huizenga School of Business and Entrepreneurship at Nova Southeastern University
• Mikhail Kouliavtsev Department Chair of Economics and Finance and Associate Professor of Economics at Stephen F. Austin State University

Lian An Professor of Economics in the Business School at the University of Miami

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

The Fed should increase the rate gradually, since the economy is picking up, the unemployment rate is historically low at 4.1%, the hourly wage is increasing, and the stock market has hit an all-time high. To prevent any bubble forming, the Fed should increase the rate, but in a smooth and gradual way.

How many Fed rate hikes do you believe there will be in 2018? Why?

I think there should be three or four rate hikes. I do not think the rate hikes will be more than this. Although the market is in good shape, there is still room for improvement -- it has not reached the stage of overheating. For example, while the unemployment rate is low, the broader measure of underemployment -- representing those who want full-time jobs but end up with part-time jobs -- remains higher at 8.2% in February, which is above the 7.9% in 01-07 expansion and 6.8% in 2000 expansion. In addition, the stock market is getting volatile recently; if the rate hike happens too fast and is too much, the economy may be sent into a recession.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

Powell has served under Yellen. To make the transition smooth, Powell will resume the policy stance from Yellen and is expected to keep many of her "slow and steady" policies in place. Powell is the first non-economist Fed Chief since the late 1970s, and he has only been at the Fed when the economy is expanding, and has no prior experience running the Fed when the economy is in recession. In addition, Powell is less internationally positioned, which might indicate that he is more conservative.

How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

Cordray's contribution as CFBP director is that he has reshaped mortgage lending standards, implemented stronger enforcement, and created a greater watchdog presence over big Wall Street banks. Under his leadership, the agency tightened underwriting standards for mortgages, required more disclosure on credit card rates and fees, and introduced federal government oversight to payday lending. These have put Cordray in disagreement with Republican lawmakers, and Republican opponents said "the CFPB has hurt more consumers than it has helped." So Cordray's move may signal a possible change in tone and approach by regulators.

Alan Green Associate Professor and Department Chair of Economics and Global Development Program Coordinator at Stetson University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

Most likely yes, barring any unforeseen economic shocks. The economy overall is strong, unemployment is low and the changes from the tax bill are likely to increase inflationary pressures that will necessitate rate increases by the Fed.

How many Fed rate hikes do you believe there will be in 2018? Why?

That will depend on what prices are doing. Some early reports of slightly higher than expected inflation startled the stock market already. If prices rise fairly quickly, we may see more increases this year than the three increases from last year. The Fed has seven more meetings in 2018; I would not be surprised to see four rate increases overall.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

Jerome Powell was easily confirmed, in large part because he was expected to largely continue current policies. I’m not expecting any surprises from Mr. Powell on interest rates; if inflation is coming in above 2 percent, he is likely to argue for rate increases just as Dr. Yellen would have done. There may be some marginal differences on regulation, but those will not likely have a large impact on the economy.

How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

The Fed’s regulatory mission is rooted in stabilizing the macroeconomy, while the CFPB has a more micro-focused mission of protecting consumers who may not be fully informed about financial products. The departure of Director Cordray marks a weakening of the CFPB. If the Fed thinks that weakening poses any systemic threat, they might increase their oversight accordingly, but I think that is not likely. The Fed will more likely continue to focus on ensuring that banks are sufficiently capitalized, especially as a recession is quite possible in the next few years.

David L. Kelly Professor of Economics in the Business School at the University of Miami

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

Yes. Inflation now is nearly at the Fed target of 2% and has been rising.

How many Fed rate hikes do you believe there will be in 2018? Why?

The Fed projects three rate increases this year. It is unlikely that any new economic data will be so unexpected that the Fed reconsiders. So, three rate increases is my projection.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

Yes. Powell worked closely with Yellin and agrees with her less aggressive approach on interest rates. Powell also lacks an economics degree and will therefore have to rely on the Fed staff, which is committed to the current approach. Powell favors a less aggressive approach on bank regulation, which is one difference. Still, I expect him to defer to the more aggressive Fed staff, at least initially.

How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

The main difference here is not banks, but other financial institutions. Cordray expanded the CFPB’s role way beyond the legislation which covered systemically important institutions to pay-day lending, car dealerships, insurance companies, etc., which pose no systemic risk. The new head will return the CFPB to its original mandate. The only difference with respect to banks would be in terms of small issues, such as fees on overdrafts, which are likely to be less regulated. This will incentivize banks to offer checking accounts to customers with lower credit scores.

Beth Wilson Professor in the Department of Economics at Humboldt State University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

Yes -- if it seems like the economy is overheating, then the Fed must raise rates to avoid inflation. The economy seems to be very strong and wages have started to rise, so that is why rate hikes make sense. In fact, the markets got skittish when the data came out that showed wages rising -- it seems very certain that interest rates will rise. However, the big question mark is Trump's tariffs, which are likely to slow the economy -- thus, we might not need as many rate increases.

How many Fed rate hikes do you believe there will be in 2018? Why?

Like I said above, it depends on what happens with the tariffs.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

Yes -- no differences.

Ky Yuhn Associate Professor of Economics in the College of Business at Florida Atlantic University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

The Fed's action depends on how strong inflationary pressure will be. The Fed's target inflation rate is 2%. Some inflationary pressure might develop in 2018, but I think the potential inflationary pressure is manageable and should not be worrisome. If the Fed considers it inevitable to raise the federal funds rate to curb inflationary psychology, it will suffice for the Fed to send a signal to the market by raising the rate once or at most two times. The market fundamentals are very robust, but the stock market has exhibited wide gyrations in recent times, which is primarily attributable to potential interest rate hikes.

How many Fed rate hikes do you believe there will be in 2018? Why?

I anticipate three federal funds rate hikes. The reason will be provided in the following answer.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

The former chairwoman (Janet Yellen) is dovish, whereas the new chairman seems to be hawkish in their attitudes toward the economy, especially toward inflation. Thus, the new leadership is more likely to put the priority of monetary policy on curbing inflation than the former chairperson. This means that Jerome Powell will be more concerned with economic stability than economic growth.

William Seyfried Professor of Economics and Associate Dean for Academics at Rollins College

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

Yes. The economy is performing well and the job market is tight. Meanwhile, the federal funds rate is lower than the inflation, meaning the “real” interest rate is negative (simulative). Given the state of the economy, the “real” federal funds rate should be positive (the question is how positive). Note that the real federal funds rate is the federal funds rate adjusted for inflation.

How many Fed rate hikes do you believe there will be in 2018? Why?

Four increases in the federal funds rate are justified, given the current state of the economy. That would still result in a real federal funds rate of less than 1%.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

I don’t know how much of a difference it will make on interest rates. A Fed led by Janet Yellen would probably also increase interest rates multiple times in 2018. President Trump has appointed other members of the Fed who may be slightly more likely to increase interest rates compared to their predecessors, and also may lean more towards deregulation. Jerome Powell is the first non-economist to lead the Fed in decades, and appears to solicit input from others more than previous Fed Chairs before making decisions.

John T. Harvey Professor of Economics in the AddRan College of Liberal Art at Texas Christian University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

You kind of have to back up on this one and consider their rationale. There are two essential premises underlying their policy stance. One is that interest rates have a significant effect on economic activity, and the other is that economic growth can cause undesirable inflation. Both are highly questionable. With respect to the former, economists going back to at least Keynes argued that firms are relatively interest-rate insensitive. They would, of course, prefer lower ones to higher, but the far more important determinant of physical investment is their expectation of profit. Interest rates fluctuate only over a very narrow range as compared to the latter, and they are far less volatile. Witness the widespread lack of response to near-zero rates in the aftermath of the Financial Crisis. Indeed, even the Fed has recently released research saying the same thing. Granted this is going on 100 years since Keynes said it, but kudos to them for publishing this.

Second, even if we were to grant their first premise, the argument that economic growth causes unwanted inflation is flawed. Their basic idea is that as the economy “heats up,” this causes various bottlenecks and rising prices. Furthermore, these are harmful and should therefore be resisted. Take these one at a time. First, remember all the inflation during the massive expansion of the 1990s? Me neither. However, during the horrible slump of the mid-to-late 1970s and early 1980s, inflation was rampant. Of course, the latter can be traced directly to the OPEC oil embargoes (the first one imposed in the aftermath of the 1974 Arab-Israeli War). Is it possible for high rates of growth to strain capacity and cause rising prices? Certainly, but that’s rarely what we truly witness.

But wait, there’s more! Let’s say we did enter a period of such strong growth that it caused rising prices. So what, why should we stop it? First off, we should be delighted with such robust increases in GDP and employment. Second, the market system has built-in mechanisms to deal with this. In those markets where they are experiencing shortages, profits rise. This induces entrepreneurs to increase output -- precisely what consumers want.

Furthermore, when the prices rise, consumers are induced to find substitutes. Prices, profits, costs, wages, etc., are signals to the market. When they move, this creates precisely the incentives one would want in order to cause the market to increase the quantity supplied of those goods and services in highest demand. In short, inflation caused by high demand is not harmful inflation. It is a set of very useful signals to suppliers and demanders. Inflation created by OPEC, however, is a massive redistribution of income made possible by the ability to avoid competitive pressures. It did terrible harm.

In neither case does it make sense to raise interest rates -- assuming this were actually effective. Long story short, the Fed should be shifting its attention away from tweaking interest rates and toward actually regulating the financial sector. But that’s a whole different story.

Alexander William Salter Comparative Economics Research Fellow at the Free Market Institute and Assistant Professor of Economics in the Jerry S. Rawls College of Business Administration at Texas Tech University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

At a broad level, the Fed should try to set its policy rate to match as closely as possible the "natural" rate of interest. This rate is unobservable, so the Fed has to do the best it can by making decisions based on prevailing economic conditions. Economic growth is projected to be fairly robust through 2018 (although if the Trump administration's tariff plans go through, this may change). This should put upward pressure on interest rates. The Fed will likely respond by hiking its policy rate, to keep market rates in line with what economic fundamentals dictate interest rates "should" be.

How many Fed rate hikes do you believe there will be in 2018? Why?

That greatly depends on how the Fed, and its decision-makers (the Federal Open Market Committee, FOMC), want to proceed. Past FOMCs have favored a gradual approach. If there are going to be rate hikes, I would expect more smaller rate hikes rather than a few discrete jumps. But this may be very sensitive to how the new Fed’s chair, Jerome Powell, wants to start his term. Experts seem to agree that Powell is neither overly dovish or hawkish on monetary policy, so perhaps the moderate approach is the best prediction given the evidence. But you never really know with a new chair.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

The new Fed chair, Jerome Powell, has been on the Board of Governors since 2012. Thus far, he has been moderate on monetary policy (neither favoring loose nor tight money), and seems cautiously optimistic about the Dodd-Frank reforms. In terms of monetary policy, my best guess is that Powell will try to normalize monetary conditions (shrink the Fed's balance sheet and return to ordinary monetary policy operation channels), but slowly. In terms of the new regulatory powers acquired by the Fed since the financial crisis (both de facto and de jure), I expect Powell to be generally supportive of public oversight, but with a relatively lighter hand.

How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

While the CFPB was established with the best of intentions, economically, it functions pretty much how most regulations function: by creating legal barriers to entry and operation for firms, it implicitly favors large, established firms against smaller or newer firms, thereby restricting competition. The Trump administration thus far has been fairly pro-business and, to a lesser extent, pro-market (these are not the same). I would expect Trump's new appointee to head CFPB to uphold its Congressional mandate, but in a manner that has a relatively lighter footprint on business activities. In other words, I expect Trump's CFPB to be more likely to come down on the side of business rather than government. That may or may not be a good thing, depending on whether that means reducing costly and ineffective restrictions on financial business practices (good), vs. handing out favors to politically connected firms, or classes/categories of firms that contain politically connected ones (bad).

Richard J. Cebula Professor of Finance and Walker/Wells Fargo Endowed Chair in Finance in the Davis College of Business at Jacksonville University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

The Fed should raise rates, but very slowly, so the economy can adjust in an orderly fashion.

How many Fed rate hikes do you believe there will be in 2018? Why?

I expect two or three rate hikes. More than that will yield financial market instability.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

The new chair will likely follow the pattern established already at Fed; however, he is not a Ph.D. economist -- that is worrisome.

Alex C. Hsu Assistant Professor of Finance in the Scheller College of Business at Georgia Institute of Technology

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

Yes, the Federal Reserve should increase rates in 2018. First, the economy is booming. All indicators underpinning the real economy, such as jobs creation and corporate earnings, are positive. Nominal rates should be stepped up to normalize economic activity. Furthermore, as the main monetary policy instrument, the short rate needs to be comfortably away from the zero lower bound before the next recession hits. Second, there are ample signs that cash investors are taking more risk to seek higher yields because Treasury yields are not attractive enough. For example, M&A multiples are near all-time highs, suggesting investors are taking extremely levered positions because borrowing is cheap. This is a danger to the health of the financial system. Higher federal fund rates can alleviate some of this behavior.

How many Fed rate hikes do you believe there will be in 2018? Why?

The expectation from academics and Federal Reserve watchers at the beginning of the year was that there will be four rate hikes in 2018. However, anecdotal evidence suggests that market participants are expecting a number lower than four and in the range of two. I believe ultimately, there will be three hikes in 2018, as the Federal Reserve is conscientious of the stock market outlook.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

New Federal Reserve Chairman Powell is seen as someone who will largely continue the policy direction implemented by outgoing Chairwoman Yellen. Chairman Powell is not an economist by training, so the key is going to be the economist appointed as the Vice-Chair. On the other hand, in terms of banking supervision, I expect Chairman Powell to bring a lot more deregulation inclination to the job. This is consistent with the path shown by other President Trump appointees.

Albert Williams Assistant Professor of Finance and Economics in the H. Wayne Huizenga School of Business and Entrepreneurship at Nova Southeastern University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

The federal funds rate is the interest rate that financial institutions (banks) charge each other for overnight borrowing to meet their depository requirements set by the Federal Reserve Bank (central bank of the U.S.). The federal funds rate was at 8.25 percent on January 1, 1990. Approximately 10 years later, it fell to 5.75 percent (February 2, 2000). By December 2008, it fell to between 0 and 0.25 percent. As of January 31, 2018, it has risen to the 1.25 percent to 1.50 percent range. On March 21, 2018, the Federal Open Market Committee (FOMC) will determine if it will continue to increase the rate or not, and by how much.

Why so many changes? The federal funds rate is a tool used by the Federal Reserve (through its FOMC) to adjust the economic growth in the U.S. If the economy is growing too fast, the Federal Reserve will apply the brakes to slow it down. It does this in a unique way. It removes money from the economy which tends to slow down economic growth. By removing money from the economy, this drives up the federal funds rate and, more importantly, other interest rates, which eventually slows down borrowing and investments.

In macroeconomics, we say that the Federal Reserve must contract the money supply to slow down economic growth. The technical process to reduce the money supply which causes the federal funds rate to increase is for the FOMC to sell Treasury bonds. For example, if an individual buys $50,000 worth of these bonds, this money is sent to the Federal Reserve. The Federal Reserve sends the person an electronic record of the purchase of these bonds. That $50,000 is now kept in the Federal Reserve and out of the economy. If this is done in the billions of dollars, you can see the impact of reducing the money supply and slowing down the economy.

So, do we need to slow down the economy in 2018? That is, “do we need to increase the federal funds rate?” The government has already cut corporate taxes (fiscal policy), which should stimulate the economy to grow. If we increase the federal funds rate, then this would put the brakes on the economy. So, with one foot, we press the accelerator to fuel the economy and, with the other foot, we are pressing the brake to slow down the economy. Of course, the magnitude of the forces on the pedals will impact the speed of the growth of the economy. So, with this background information, I believe that we may have one, or at most two more small changes in the interest rates in 2018. We should settle around 2 percent by the end of the year.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

I believe that the newly appointed Fed Chair, Mr. Jerome Powell, will continue with the current policy of cautiously increasing the federal funds rate (turning the dial slowly). If he wants to increase economic growth, then a high federal funds rate is not the answer.

How might the departure of CFPB Director Cordray influence how banks are regulated, particularly those under the auspices of the Federal Reserve?

An outcome of the Great Recession of 2008/2009 is the Dodd–Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau. It was formed to protect consumers from being exploited by businesses, especially financial institutions. The foundation of this statement is that the majority of Americans are lacking in financial literacy (a factor leading to the Great Recession). Hence, the CFPB had put in regulations to protect consumers and provided programs to educate consumers about money management -- financial illiteracy is a two-hundred-year problem.

With the departure of CFPB Director Cordray, and the new political leadership reducing regulations (to foster economic growth), it is likely that the Dodd–Frank Wall Street Reform and Consumer Protection Act will be amended to allow for less regulations. I believe that many Americans are still financially illiterate and will be impacted negatively with less protection. I recommend that these Americans urgently take a crash course in financial literacy. They should also have a financial mentor that they can trust. All students at universities should also take a course in financial literacy to try to break the cycle of poor financial management. We must teach financial literacy to all ages in school.

Mikhail Kouliavtsev Department Chair of Economics and Finance and Associate Professor of Economics at Stephen F. Austin State University

Should the Fed be increasing rates or not for 2018? Yes or no? Why?

In short -- yes. It seems from the latest FOMC report that there is some growth in all regions “at a moderate pace;” unemployment remains low, and new job creation numbers are quite good. Given all of this, the major risk to the economy in the short term would be from inflation, so the Fed should direct its attention to rising prices. Also, because there are always lags with any policy, even monetary policy (though this is less of an issue than with fiscal policy, or when rates need to be lowered rather than raised and are near zero already), the Fed would want to get ahead of any anticipated inflation rather than wait for clear signs of it. Again, the latest “beige book” report mentions increasing prices in all districts and signs of “moderate inflation,” so we should expect rate hikes.

What is different about the current climate is that the new tax cuts signed by the Trump administration are a form of expansionary policy that is meant to stimulate growth. If the Fed were to raise rates sharply, it could have a contracting effect, thereby offsetting some of the tax cuts’ benefits. I think the Fed will still prioritize price stability and hitting its 2 percent inflation target over worrying about coordinating its policy with the fiscal side. With that said, the new Fed chair is the wildcard in this (see below).

How many Fed rate hikes do you believe there will be in 2018? Why?

This is very difficult to predict. The FOMC meets frequently and assesses the latest economic conditions before deciding how to act, so making a long-term prognosis is not a very fruitful venture -- whether to make subsequent hikes will depend on whether the earlier ones were effective or even necessary. The March 20-21 updates to economic forecasts will determine much of what the Fed does at that point and later in the year.

The new chair, Jerome Powell, seemed to hint that there may be four rate increases this year, whereas in December, it appeared as if there may be only three.

Do you think that the new Fed chairman appointed by President Trump will extend current policies? What differences should we expect?

Unlike Janet Yellen, the new chair, Jerome Powell, is a supporter of the Trump tax cuts. This may mean that he will advocate for monetary policy that is more in line with letting the tax cuts work -- i.e., not raising the rates too much too soon. On the other hand, under Powell, the Fed could take the position that its sole responsibility would be to maintain low and stable inflation, which would mean raising rates at the first signs of rising prices, and letting employment and growth develop on their own.

In general, Powell appears to be well-respected among economists in spite of not being a PhD-trained economist. It has been suggested by some analysts that because Powell is not an academic -- unlike Yellen and Bernanke before her -- that he may be swayed easily by others’ views. This itself may mean that Fed’s previous approaches will continue relatively unchanged.

2018 Federal Reserve Rate Hike Survey

WalletHub conducted a nationally representative survey to see what people know about Federal Reserve interest rate increases and how they impact our wallets. The survey was conducted online from June 26 to July 3, shortly after the Fed raised its target rate for the second time in 2017. You can find the complete results in the following infographic.

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