Fed Projects More Rate Increases, Anticipating Faster Growth Under New Administration

Date: December 15, 2016

Central Bankers Expect Stimulative Policies, Faster Growth

The Federal Reserve this week raised its benchmark federal funds rate by a quarter percentage point, as expected, and Bloomberg News reports, “new projections show central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.” Most media analyses said the decision was prompted partly by the anticipation of faster economic growth under the incoming Administration. The Los Angeles Times says the Fed reacted to “improving economic conditions combined with anticipation of stimulative policies from the incoming Trump administration that could fuel inflation.” Reuters also reports “central bankers adapted to the incoming Trump administration’s promises of tax cuts, spending and deregulation.” NBC Nightly News reported that “much of” what the Fed does in 2017 “could depend on the Trump administration’s plans for the economy. If the economy grows too quickly, the Fed would have to raise rates faster to keep inflation under control.” USA Today says Trump’s proposed economic plans (tax cuts, infrastructure and defense spending) “would spur economic activity and likely increase inflation as well as the national debt, possibly forcing the Fed to lift its benchmark rate more rapidly to head off excessive price increases.”

What This Means For Small Businesses

The Fed’s decision to boost its key short-term interest rate is a vote of confidence in the economy and that the strong labor market, stable prices, and other economic data point to continued moderate growth. With small business optimism already on the upswing, the Fed’s move should add to the momentum. However, the Fed’s projection of three rate hikes in the coming year raises the prospect that Fed policymakers may over compensate.

Additional Reading

Other coverage ran in Politico, the New York Times, the Washington Post, The Hill, and the Huffington Post.

Note: this article is intended to keep small business owners up on the latest news. It does not necessarily represent the policy stances of NFIB.

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