Economic Outlook - January 2017
- The Fed on December 15 raised its key short-term rate by 0.25% to a range of 0.5% to 0.75%. The Federal Reserve’s new “dot plot” is signaling three increases in interest rates in 2017 versus two under the prior estimate. The dot plot is used by Fed policymakers to mark their forecasts for interest rates over the next several years. The Fed stuck to its forecast for three rate hikes in both 2018 and 2019, though it nudged its long-run target for fed funds back up to 3% from 2.9%. Wall Street had speculated the Fed might more aggressively raise rates in 2017. Inflation has picked up and the new administration plans to boost spending and cut taxes in an effort to speed up the economy. The Fed hopes to temper such expansion through gradual rate hikes.
- Home prices leapt 1.1% in November, a sign that the rise in mortgage rates hasn’t yet hobbled the housing market. The home price index was up 7.1% compared to a year ago. It was the fourth-straight yearly increase for the index, and the biggest annual gain since May 2014. Historically tight inventory amid strong demand has bolstered prices for many months. However, the massive mortgage rate move started after the election, so its true impact on demand won’t be clear for months or more. The forecasters project a 4.7% annual increase in home prices over the coming 12 months. In November, only one state – Connecticut – registered an annual decline in prices, though the gains ranged from 0.6% in Delaware to 10.3% in Oregon. Home prices in 27 states have regained their pre-2008 levels –23 states have not.
- Fed members appear to believe the U.S. labor market is about as good as it’s going to get and unlikely to show much more improvement. The Fed for several years has said it expected “further strengthening” in the labor market. Now, the Fed says it merely expects “some further strengthening.” The change in language is significant. Although the Fed thinks the jobless rate is likely to bottom out at 4.5% and stay there for the next two years, the bank also stuck to its view that the ideal long-term rate is 4.8%. One potential explanation is that the Fed believes the big drop in unemployment in November – to a nine-year low of 4.6% from 4.9% – was a statistical outlier. As a result, the unemployment rate could inch up in the next few months and level off just below 5%.
- The persistence of chronic unemployment or underemployment among a sizable portion of the U.S. population helped real estate developer Donald Trump win the 2016 presidential election. He has vowed to use the full force of the federal government to create millions of new jobs. Meanwhile, the Fed no longer seems to think the labor market will get all that much better. Many companies even complain there are not enough skilled workers to go around to fill the record high job openings. [Chart: U3 is the official unemployment rate. U5 includes discouraged and all other marginally attached workers. U6 adds on those workers who are part-time purely for economic reasons.]
* This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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