Now that the reins of the Federal Reserve (Fed) have been handed to Jerome Powell, there are concerns the bankers will aggressively hike interest rates. And it has many on Wall Street terrified of a potential market downturn.
That’s because higher interest rates could pull cash out of the stock market into bonds. It also has the potential to tighten credit for consumers and businesses alike.
But even that fear may not slow the future pace of hikes from Powell’s Fed.
According to recent testimony before Congress, Powell noted that the Fed sees steady growth continuing and no serious risks on the horizon that might make the central bank pause its planned rate hikes, as noted by The Globe and Mail.
And, in the minutes of the January 30-31 FOMC meeting, it was noted that:
“The economic expansion continues to be supported by steady job gains, rising household wealth, favorable consumer sentiment, strong economic growth abroad, and accommodative financial conditions.”
Shortly thereafter, Powell hinted at four hikes this year after only calling for three hikes at the December 2017 FOMC meeting.
“We’ve seen continuing strength in the labor market. We’ve seen some data that will — in my case — add some confidence to my view that inflation is moving up to target,” Powell added, as quoted by Yahoo Finance. “We’ve also seen continued [economic] strength around the globe, and we’ve seen fiscal policy become more stimulative.”
The Fed is very concerned about inflation.
For one, the CPI (Consumer Price Index) increase in January 2018 was greater than expected. Even if we remove food and energy from the CPI, core CPI still increased at an annual rate of 3.6%, which is well above the long-term Fed target of 2%.
Two, we’re seeing a stronger jobs market, which is putting pressure on wage growth. In fact, according to CNBC, the 2.6% jump in the Employment Cost Index in 2017 “is the highest annual increase in almost 10 years. Firms will pass these additional labor costs to consumers in the form of higher prices.”
Three, President Trump’s tax bill could expand inflationary concerns, as well.
At this point, while it’s wait-and-see with what the Federal Reserve plans to do in 2018. However, there is an 88% probability of a hike this month, according to the CME Group.