No Recession if Rates Rise

A Bank Vault

A Bank Vault

Research by Oxford Economics shows that the US economy would not fall back into recession if the Fed decides to raise interest rates. Great news! However, there would be many negative consequences for growth and financial markets should they decide to raise interest rates more quickly than previously predicted.

The markets are uncertain, and the Fed has discussed raising rates sooner than their initial forecast of holding off until June 2015 before raising the federal funds rate, so Oxford Economics, and Kathy Bostjancic wanted to research what would happen if those markets dictated an steeper increase.

The Federal Open Market Committee (FOMC) has the difficult task of having to find the best time to raise rates and then communicate that to the investors. Financial markets in the past have proven to be susceptible to sudden tightening of economic policy. This happened in 1994.

The conclusion is that if the Fed does rates, as it said it might do sooner than previously anticipated, there would be consequences to stock and bond markets but it would not trigger a bear market.

The reason the Fed is considering tightening it’s policy is wage pressures which could lead to inflation. The Fed is worried about inflation, but they have stated their number one goal is full employment. There are signs that these wage pressures are already building. The unemployment rate gap measures show little slack in the short-term unemployed.

The possible impact higher rates could have on the economy include less growth, less business investment, slower housing market activity, and a stagnant unemployment rate. This stagnant unemployment rate is contrary to the Fed’s goal of full employment.

There would, of course, be a positive effect as well, in the form of foreign investors interested in safe investments in a stronger dollar. This, according to Oxford Economics, would not offset the negative impact of increasing rates.

One thing is for sure, it’s important the Fed’s communicates and manages market expectations. Whether investors will listen remains to be seen.

 

 

Who is Janet Yellen?

Janet Yellen is now a household name now that she has been appointed a the Chair of the Board of Governors of the Federal Reserve System. She had served as the vice chair making her the likely successor to Ben Bernanke. An impressive woman in a small frame is the first woman to hold this important position. In 2014 she was ranked as second most powerful woman in the world by Forbes Magazine.

Yellen was born in New York city to Jewish parents and ended up going to Brown University ultimately getting a PhD from Yale University in economics. She is married to George Akerlof who is quite the economist in his own right.  In 2001, George won the Nobel Memorial Prize in Economics, but one of his more popular articles is, “The Market for Lemons” in which Akerlof discusses markets with severe asymmetric information like used cars. His Nobel Prize is shared with Joseph Stiglitz who also oversaw Yellen’s PhD thesis.

After graduating Yellen went on to teach at Harvard and The London School of Economics. In the 1980’s Yellen taught and researched at UC Berkeley where her husband continues to teach.

Yellen started her career in the political realm in 1997 when she served as chair of Bill Clinton’s Council of Economic Advisors. This is the Bill Clinton that whose economic policy had one of the most popular and was liked by both parties. She eventually moved on to The Federal Reserve Bank of San Francisco in 2004 where she, in many ways, predicted the crash as a result of the housing bubble. In fact, her predictions throughout her career have been impressive.

Wall Street Journals' Ranking of Fed Forecasters

Wall Street Journals’ Ranking of Fed Forecasters

In Wall Street Journals’ ranking of fed forecasters, Janet Yellen was number one.

In 2010, Yellen was sworn in as vice chair of the Fed by Ben Bernanke, who was the chair of the Fed at that time. Four years later Yellen was confirmed as the Fed chair.

 

Information on KathyBostjancic.com

Kathleen (Kathy) Bostjancic’s Official Website can be found at KathyBostjancic.com

The website contains biographical information on Kathleen, helpful links, press features, and so forth. Please explore the website for additional information.

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Kathleen (Kathy) Bostjancic's Press Website Screenshot

Screenshot of Kathleen (Kathy) Bostjancic’s Official Website.