Fed May Slow Pace Of Tightening Due To Manufacturing Weakness, Dollar’s Rise

Date: January 07, 2016

Labor Market Strength May Prompt Fed To Stay On Course

Federal Reserve policy makers indicated at their December meeting that their intention is to continue raising the benchmark Federal funds rate by one quarter point at each quarterly meeting in 2016 after their initial decision for a quarter point increase. However, the strengthening dollar and low energy prices, which have contributed to a contraction in US manufacturing and industrial production, may prompt the Fed to diverge from this course of action. The Wall Street Journal reported the Fed may find it difficult to continue tightening monetary policy, which would reinforce the dollar’s strength and make US exports less attractive, because of the possible impact on the manufacturing sector.

Reuters reported Deutsche Bank economists reduced their US GDP forecasts to 0.5% for the fourth quarter of 2015 and to 1.5% for the first quarter of 2016 after recent disappointing data on construction spending, manufacturing, and trading. However, in a research note, the investment bank said that despite its downgrade, economists expect more improvement in the nation’s job market, enabling the Fed to raise interest rates by another 25 basis points during the first quarter.

What This Means For Small Business

The Fed will need to carefully balance the lagging manufacturing sector against the strengthening labor market. If the Fed continues on its preferred course of action of slowly raising the benchmark rates to a more historically normal level, it could have a negative impact on the ongoing recovery. Rising interest rates would also pose a challenge to the stagnant small business sector.

Additional Reading

US News & World Report staff writer Simon Constable predicted that the dollar will continue to rally as the Fed’s policies increasingly diverge from those of the European Central Bank and the Bank of Japan.

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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