On Wednesday, the Fed raised the key 0.25% as expected in a unanimous vote. The big surprise was that 16 members also forecasted another key interest rate hike by the end of this year. This is most likely due to the fact that the is still significantly above the Federal Funds rate.
During his press conference, Fed Chairman Kevin Warsh said the FOMC vote “shows our resolve to achieve price stability on a timelier basis.” Warsh cited three developments since July that brought the FOMC consensus together, namely (1) stronger economic growth, (2) insufficient improvement in inflation, and (3) increased geopolitical risks. This last point was key, since the prospect of more inflationary pressures from higher oil prices is clearly bothering the FOMC, as higher transport costs (e.g., diesel prices) cause inflation to spread to many goods.
Naturally, President Trump was not happy with the Fed rate hike and called it a “hostile” act. However, Trump’s relationship with Kevin Warsh remains fine, because he acknowledged that he had talked to the Fed Chairman before the FOMC meeting. Trump said, “I told Kevin, I said, you might as well vote with the board (FOMC) because it’s just not going to matter.” Warsh did Trump a favor by citing geopolitical risks, so if Trump can stop some of the hostilities in the world and get prices to decline, then the Fed may run out of reasons to raise key interest rates.
My prediction of 5% growth last December on Maria Bartiromo’s show may finally come to fruition. In the wake of the strong retail sales report, the Atlanta Fed raised its third-quarter GDP estimate to a 5.1% annual pace. The Commerce Department on Wednesday announced that surged 1.2% in August, which was well above economists’ consensus estimate of a 0.8% increase. Fully 12 of the 13 categories surveyed reported an expansion in August. Consumers were clearly out and about in August, since sales at bars and restaurants rose 1.2%. Auto sales rose 0.6% in August. Excluding autos and gas stations, core retail sales rose a healthy 1.2%.