The Federal Reserve’s Next Move on Interest Rates Part 1

Highlights from my article, “It’s not a party economy, but it’s enough for a Q2 Fed rate hike” for Yahoo Finance:

Inflation, as measured by the PPI-FD, for the month of December was in line with expectations. However, the year-to-year change from December of 2015 was 1.6%, meaningfully hotter than the 1.3% that was called for by Bloomberg consensus. The unrevised PPI-FD in November of 2015 was -1.6%. Considering that this latest reading was 1.6%, that does reflect a healthy, though stubbornly still below target, rate of inflation.

Inflationary trends are emerging and the Fed’s raise of 25 bps last month could well act to support this trend in spite of the fear that some have that any monetary tightening could choke off the yet tenuous embers of incremental inflationary acceleration.

Consumers voting with their pocketbooks and enthusiasm; one of the factors that could well contribute to the concept that the Fed’s monetary move in December will complement current inflationary trend as opposed to extinguishing it, is consumer sentiment. A clear correlation between consumer sentiment and consumer spending has been a long standing fact of economic life. Including the data registered in the autos sales vertical, retail sales for the month of December were 0.6% — solid, though one tick below Bloomberg consensus which was calling for 0.7%.

Heading toward full employment; in the broader economic landscape, the national unemployment rate is close to its cycle low at 4.7%, as of the December reading released on January 6.

The economic landscape at the outset of 2017 speaks to modest growth, incremental gains in inflation, cycle highs for consumer sentiment and small business optimism. Stable energy prices, continued expansion in the housing sector of the economy and the prospects of a leaner regulatory regime in Washington all should lead to a constructive narrative for rates. If these trends remain intact through Q1, my expectations are that a good argument could be made for a 25 basis point move by the Fed on rates sometime in Q2.

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