Home>Video>Fed May Have to Raise Rates Faster to Keep Up With Inflation

Fed May Have to Raise Rates Faster to Keep Up With Inflation

Wed, 9 Nov 2016

Even if the Fed holds off in December, the pace of future rate hikes may have to rise due to the inflationary nature of many of Trump's policy proposals.


Video Transcript

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. One of the things on investors' minds on this day after Trump's victory is what's going to happen to the Federal Reserve and monetary policy. I'm here with Bob Johnson, our director of economic analysis, for his take.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's start off quickly with looking at the December Fed meeting. Do you think that the uncertainties surrounding what Trump's agenda is going to look like will cause the Fed not to raise rates in December?

Johnson: I think it's going to have a very strong influence on it, and there may be some offsetting factors. But what we've seen in a number of cases overseas where we've had the Brexit vote and a couple of other national elections where we've had issues and dislocations, the central bankers have been there to backstop and they quickly either reduced rates or at least maintained them where they are at, to support the markets so that things don't kind of go into a free-fall. So, to kind of protect markets we've seen this trend where central bankers don't really want to act in the middle of all the uncertainty and all the hoopla here. So, I think, that's certainly another thing that moves strongly against a rate hike in December along with what we've already talked about, kind of a softening economy, and certainly, that may even get a little bit worse here, too, if the softening economy gets a little bit worse because of the uncertainty that we've created.

Glaser: But then how do we think about inflation then? Those price levels have started to move up, and I know it's something that you've been concerned about. Is there going to be even more inflation? Is the Fed kind of behind the ball here?

Johnson: Our view is they've been kind of ahead of the ball. They probably would have been better off acting six or nine months ago when markets were a little bit confident where it may have been able to absorb a rate increase better than it did. But I think now we are probably a little bit behind the eight ball. They may do something here in the short run just to keep things moving along to keep the gears oiled, so to speak, and not try to rock the boat. But after that certainly some of the policies we're seeing potentially out of the Trump administration, and again, we don't know how many will get implemented, but a lot of them have kind of a little bit of an inflationary bet to them which would certainly force their hand a little bit sooner than later.

Glaser: What sort of mechanisms of those policies would create inflation?

Johnson: I think the number one is that he has talked about tax cuts, which having both houses of Congress, I think, some type of tax cut or restructuring is probably quite likely. And he probably wants to do and especially, since he has got a background in building things, that infrastructure building will be part of the equation. And those things, kind of more spending combined with less revenues, is going to tend to push the deficit up which nobody seems to have a real problem with these days which is a little bit scary, but it certainly will push the deficit up. And historically, deficits have helped move up inflation and have generally caused rates to move higher. So, we've had this short-term dislocation situation where the Fed wants to help, but certainly you've got this tax policy and spending policies, if implemented, would likely raise inflation and cause higher interest rates.

Glaser: So, it could be that over the medium term we could see higher rates than maybe we expected only a few months ago?

Johnson: Yeah, and I think, higher inflation, too. And certainly, on the trade side of the house, if we put up some trade barriers there, that makes goods more expensive in the U.S., that's certainly kind of an inflationary thing that the Fed will have to keep in mind. So, there's a number of things that he could do that would scare people. Even if he limits immigration a bit, that may have the side effect of raising wages a little bit more than the Fed would like to see. Obviously, it's what a lot of workers would like to see and may not be at all bad, but it's certainly something that's probably a tad on the inflationary side and may force the Fed into action.

And I think what it's done is it's limited the Fed short term in terms of what they could do in interest rates so as not to upset the apple cart. On the other hand, I think, now we're going to have a more pronounced rise in interest rates that will come faster and in closer increments than the Fed may have hoped for, if indeed his policies get implemented.

Glaser: Well, Bob, I certainly appreciate your take on what the Fed could do this morning.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.

  1. Related Videos
  2. Related Articles
  1. Retirees: Beware of Complacency

    Christine Benz warns that a strong stock market may mean that retirees are overlooking some key risks.

  2. Johnson: Wage Data Not as Strong as It Looks

    Headline data on wages looks encouraging, but after factoring in inflation and fewer hours worked the picture is less rosy.

  3. Getting a Read on Today's Economy

    Fed fixation, slow growth, dollar dilemmas, and overheated markets topped the list of key topics in our opening conference panel, featuring Morningstar's Bob Johnson , Susan Schmidt of Mesirow Financial, and Northern Trust's Carl Tannenbaum.

  4. Sharpen Your Portfolio Plan for 2014 and Beyond

    Roundtable Report: At the outset of 2014, Morningstar strategists dig into the market's current valuation and expected return, seek out high-quality U.S. and foreign stock opportunities, size up the role of cash today, assess the Fed's impact on the market, and reveal the best ways to fight inflation .

  5. How Rising Yields Are Impacting Bond Funds

    Along with the expected categories that are struggling, emerging-markets and the muni market have been hit hard, says Morningstar's Sarah Bush.

  6. How to Invest in a Slow-Growth World

    Panelists at the Morningstar Individual Investor Conference discuss how to position for profit amid anemic growth, energy volatility, the threat of inflation , and extraordinary central bank activity.

  7. Markets and Economy: Put the Big Picture in Perspective

    BlackRock's Heidi Richardson, University of Chicago professor Randy Kroszner, and Morningstar's Bob Johnson tackle today's key macro issues--including employment, housing, consumer and corporate spending, the Fed taper, and much more.

  8. Johnson: U.S. Faces Stagflation Threat

    The Fed is in a quandary as inflation data confirms that price levels could keep rising, but growth remains tepid.

©2017 Morningstar Advisor. All right reserved.