We’ll touch on several bases today but let’s begin with yesterday’s decision by the Fed to raise its short-term interest rate by another 25 basis-points. To no one’s surprise, the Fed Open Market Committee (FOMC) voted to raise its Fed Funds rate 0.25% to a range of 1.75% to 2.00%. That marked the second rate hike this year.
What did surprise some Fed-watchers was the fact that the FOMC is now projecting two more rate hikes this year instead of just one more as it has suggested until now. So, it now looks like we’ll get another 25 basis-point increase at the September FOMC meeting and a fourth increase at the December meeting. If so, that will put the Fed Funds rate range at 2.25% to 2.50% by year-end.
Fed Chairman Jay Powell cited the strengthening economy, a further tightening of the labor market and the latest rise in inflation as the primary reasons for adding a fourth rate hike this year. He had hinted at this possibility in recent speeches. The Fed policy statement said:
“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.” The Committee expects the economy to strengthen further and the unemployment rate to fall from 3.8% currently to 3.6% by the end of the year.
The FOMC maintained its forecast for three more rate hikes in 2019. If so, that will put the Fed Funds rate at 3.00%-3.25% by the end of next year, where it would likely stabilize. That could change, of course, depending on the economy and inflation.
The Fed Funds rate helps determine interest rates for mortgages, credit cards and other borrowing such as the rate banks charge each other to lend overnight.
Surging Fuel Prices Push Inflation to Six-Year High
US inflation accelerated in May to the fastest pace in more than six years due mainly to rising fuel prices. The Consumer Price Index rose 0.2% from the previous month and 2.8% from a year earlier, matching pre-report estimates, according to the Labor Department on Tuesday. That was the highest since February 2012 and follows a 2.5% annual increase in April.
Core CPI, which excludes food and energy, rose at a 2.2% annual rate in May, which is above the Fed’s 2% target. However, the Fed prefers to watch another inflation measure, the Personal Consumption Expenditures Index (PCE). Core PCE was up only 1.8% (annual rate) in its latest reading.
A separate Labor Department report on Tuesday illustrated how higher prices are pinching consumers’ wallets. Average hourly wages, adjusted for inflation, were unchanged in May from a year earlier, even as nominal pay accelerated to a 2.7% annual gain from 2.6% in April.
Small-Business Optimism Remains Near Record High
A widely-followed gauge of optimism among US small-business owners rose to near a 34-year high amid increasingly sunny expectations for sales and profits last month, a National Federation of Independent Business (NFIB) survey reported Tuesday.
NFIB’s Small Business Sentiment Index rose to 107.8 in May, the second highest reading ever. A record 34% of respondents said it’s a good time to expand their business. Some 31% expect sales to increase in June, up 10 points from the prior month and the highest since last November.
Businesses reporting higher sales over the last three months rose by a net 15%, the highest since 2005. The share of small businesses that raised prices in May or are planning price increases this month was the highest since 2008.
Small business sentiment has remained elevated since Donald Trump was elected president in late 2016 – with tax cuts, reduced regulations and solid economic growth supporting the optimistic outlook.
The NFIB report suggested that Trump administration tariffs, along with freight bottlenecks that have pushed up costs for some businesses, have had little effect so far on small company sentiment.
At the same time, owners continued to cite difficulty finding workers with the necessary skills and qualifications and have raised compensation accordingly amid the lowest unemployment rate in 18 years.
As I wrote last month, there are now over 6.6 million unfilled jobs open compared to 6.6 million unemployed Americans looking for work. Obviously, not all of those seeking work are qualified for the jobs that are available. So, small businesses continue to face a challenge finding workers that have the skills to fill their openings.
Finally, I’m seeing more and more forecasters revising their estimates of 2Q GDP to 4% or above. While we won’t get our first Commerce Department estimate of 2Q GDP until late July, it sure feels like this economy is taking off. Let’s hope it continues!
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