Federal Reserve Reports Moderate Pace Growth, Rising of Inflation, and Potential Increase in Federal Funds Rate

February 16, 2017

Chairwoman Janet Yellen presented her semi-annual report to the Senate Committee on Banking, Housing and Urban Affairs on February 15th where she testified that she expects the economy to continue to expand at a moderate pace with inflation gradually rising to two percent.  She also stated that the monetary policy remains accommodative and strengthening due to an improving job market, where the unemployment rate is 5 points lower than it was in 2010, increasing consumer spending, and rising incomes.

Members of the Committee and critics questioned the past policies of the Federal Reserve in keeping interest rates near zero for an extended period of time, purchasing huge amounts of bonds, and whether that actually led to a healthy economy or created the slowest economic recovery since World War II ended.  Clearly members of the Senate Committee, as well as President Trump, do not agree with all of the actions of the Federal Reserve.  Also, in the next few months President Trump will nominate three members of the seven member Board of the Federal Reserve, which may result in a change in the direction taken by the Federal Reserve and Chairwoman Yellen’s term ends in January 2018. 

Although the Federal Open Market Committee maintained the federal funds rate for most of 2016 (until the increase in December) Chairwoman Yellen stated that if employment and inflation continue to evolve as expected there will be additional increases of the federal funds rate in 2017.

Chairwoman Yellen also testified that she believes the recent uptick in the markets is due to an anticipated shift in fiscal policy by President Trump that market participants believe will stimulate growth and raise earnings.  We will have to wait and see whether there are any shifts in the current fiscal policies and whether those changes will actually increase growth and profitability. 

Based on the testimony of Chairwoman Yellen, as well as the comments and questions by the Senate Committee and the previous comments by President Trump, it seems likely there will be increases in the federal funds rate in 2017.

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