This week, the US Federal Reserve raised the Fed Funds rate to a range of 1.5 to 1.75 percent. That’s the latest sign of intent to “normalize” monetary policy, including shrinking the Fed’s $4.2 trillion securities portfolio.
Consensus is for three more increases in Fed Funds by the end of 2018. That’s based on policymakers’ updated forecast that the US economy will grow 2.7 percent and unemployment will shrink to 3.8 percent, pushing inflation above the long-stated target of 2 percent.
Consensus is also Fed Funds will reach 3.375 percent in 2020. We’ll go further: Unless there’s good reason to stall or reverse course, the Fed under Chairman Jerome Powell will try to push Fed Funds to 5 percent, where it hovered during the robust economy of the 1990s.
Does this mean it’s time for income investors to head for the hills? Hardly.
This isn’t 1980, when double-digit inflation and a self-sacrificing president provided cover for Chairman Volcker to strangle inflation at the cost of crushing the economy. Today’s action is to head off future inflation. And a global economic shock from a stock market event, reciprocal trade protectionism or something else would quickly eliminate the appetite for rate increases.
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