News Behind the Interest Rate Hike

Dan Celia
|
Posted: Mar 16, 2017 12:01 AM
News Behind the Interest Rate Hike

As expected, on Wednesday the Federal Reserve raised interest rates a quarter of a percent. The move appeared to firm up Chairperson Janet Yellen’s intentions of three rate hikes this year—meaning two more are coming. One of the main reasons the markets did so well after this hike was that many were expecting Yellen to lean toward four hikes this year, including this one. When that was not the indication, the markets rallied. Some of the factors she cited included inflation moving closer to the Fed’s target, the growth of the labor market, and the economy’s continuing advance.

Let me take a moment to point out the best news we received today. The Federal Reserve’s action was confirmation of what I’ve reported about the agency during the Obama administration.

Every time there was talk about raising interest rates during the past eight years, I predicted its wouldn’t happen. Even though I believe the Fed should have raised rates four years ago, there was a basic premise behind my argument. During President Obama’s two terms, even as politically tainted as it was, not even the Fed believed the artificially low unemployment numbers, that wages were increasing, or that we were in recovery mode.

Reaction to the Increase
It’s also interesting to note the markets’ reaction to this news: stocks climbed while Treasury yields fell. What this reflects, as I stated recently in agreement with Yellen, is that this is a real recovery. The markets and the economy really are on the rise based on expectations of a continued pro-growth environment, lower taxes and less regulation—all incentives for free markets. On Wednesday, the Fed gave us confirmation of these things, just as they gave me confirmation during the Obama administration that the recovery was nothing more than a few lines from the administration’s propaganda manual.

In fact, it looks as though the Obama administration’s “new normal” may no longer be the norm. As a matter of fact, we may return to some sort of normalcy, which means a GDP growth higher than 3 percent.

It even looks like we could reach the place where what appears to be full employment is, in reality, full employment, and that a tightening labor market is just that, which means wages are rising to meet the demand for more workers. Thus, the obvious Fed concern over keeping inflation in check.

What could derail everything—at least temporarily—is the notion that we may not get tax reform by August, or eventually, a tax reform plan that will be made retroactive for 2017. With corporate tax cuts in sight, we will hopefully see markets beginning to trade somewhat sideways, giving earnings opportunity to keep pace with valuations. Tax reform must happen before August.

Hopefully, we will see corporate earnings to continue to rise. Honest tax reform could add as much as two and a half points to earnings, which will keep the rising valuations in balance.

Of course, this means Republicans will have to come together to drive home President Trump’s agenda for growing the economy. Amid the ever-present media criticism that is often driven by behind-the-scenes bureaucratic interests, Congress needs to shed the politics and get to work. Let’s have straight talk, and action, to do what’s necessary to make America great again.