The Fed's new interest-rate path could have the US staring at a recession by the end of next year

Business Insider | 8/29/2007 | Komal Sri-Kumar, Sri-Kumar Global Strategies
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The Fed hiked rates Wednesday and said it sees two more increases this year, for a total of four. It also sees three rate hikes in 2019.

The central bank assumes the unemployment rate will fall to 3.6% and that the assumed long-run sustainable unemployment rate is 4.5%.

Problems - Calculations - US - Recession - End

There are two problems with those calculations that could lead to a US recession by the end of 2019.

There were few surprises in the Federal Reserve's decision on interest rates Wednesday. As had been widely expected, the central bank decided to increase the fed funds rate by a quarter point to a new range of 1.75%-2%. This was the seventh rate hike since December 2015, and the second this year. The Fed also indicated there would be two more increases before the end of the year, and another three increases in 2019. If the Fed does implement the tightening process as expected, that would put the the key interest rate at between 3% and 3.25% by the end of 2019.

Chairman - Jerome - Powell - Face - Uncertainties

Chairman Jerome Powell put on a brave face despite the uncertainties he currently encounters. Compared with the latest U3 unemployment rate of 3.8% in May, the Fed chairman and his colleagues assume the rate will drop to 3.6% this year. And since the Fed's assumed long-run sustainable unemployment rate is 4.5%, we are experiencing a situation that cannot be maintained without a concomitant rise in the inflation rate. To forestall a sharp pick up in prices and stop inflation in its tracks, the Fed needed to tighten further to prevent too sharp a contraction of the economy later.

There are two problems with the Fed's calculations. First, there is no precise means of measuring the level of the sustainable unemployment rate. Estimates of this long-run level range go all the way from 4.5% to 6%, and...
(Excerpt) Read more at: Business Insider
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