After voting to raise short-term interest rates by a quarter percentage point on Wednesday, the Federal Reserve raised more questions than answers for Wall Street, says former Federal Reserve Bank of Atlanta President Dennis Lockhart.
“I am very surprised myself at that reversal by the markets. Perhaps, the markets are inferring that the September move could maybe spill over to December,” he said, referring to a change in the CME Group’s Federal Fund Futures tool, which before the meeting showed odds of around 20% for a rate hike in September, but were lowered to 18% after.
“The equity markets, may also be reflecting that the Fed is getting on with the removal of accommodation by at least by explaining very thoroughly how the normalization of the balance sheet is going to work and this normalization process is moving on,” Lockhart said.
Lockhart added based on the current economic trend, it may be difficult to reach the robust economic growth rate the Trump administration hopes to see.
“I think that is a way of saying that the fiscal stimulus that had been expected several months ago has been very slow to develop and that forecasters within the Fed and the governors and presidents who contribute to the SEP [Summary of Economic Projections], the economic projections are simply not making an assumption on fiscal stimulus. What they are reflecting is the economy as they see it today and the outlook for the economy based on its functioning independent of any fiscal stimulus.”
Lockhart also warned that a number of other headwinds could weigh on economic growth projections including demographics shifts.
“I think overcoming some of those headwinds is a heavy lift and I think it’s difficult to assume that we are going to get to a sustain level of 3% easily. I really believe you have to build that economy and it takes time,” he said.