The Federal Reserve has been setting the stage for additional rate hikes from its current level of 2%, but there could be more to come and according to Federal Reserve Bank of Richmond President Tom Barkin, they must continue rising in order to reach normalized levels.
Barkin cites a generationally low unemployment level of 4% and the current inflation rate of 1.9% as counterarguments for lower rates.
“It is difficult to argue that lower-than-normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target,” said Barkin. “In addition, we don’t want to risk the credibility of our commitment to low and stable inflation. That means when the economy calls for moving back to normal levels, as do the conditions I just described, we should follow through.”
As far as how high rates must rise, Barkin left it up to the economic climate to be the primary determinant. With the capital markets full steam ahead as the S&P 500 closes in on record-setting highs, Barkin cites no specific ceiling on rates.
“The higher the underlying growth prospects, the higher the policy rate,” said Barkin.
In the government debt space, benchmark 10-year Treasury yield remained unchanged at 2.973 while the 30-year note ticked higher to 3.121 as of 1:00 p.m. ET. JPMorgan Chase CEO Jamie Dimon recently told CNBC that 5% yields are not beyond the realm of possibilities in the government debt space.
“I think rates should be 4 percent today,” said Dimon. “You better be prepared to deal with rates 5 percent or higher — it’s a higher probability than most people think.”
Not since 2006 has Treasury yields reached the 5% mark, which occurred prior to the financial crisis tin 2008. Like Barkin, Dimon’s prediction stems from signs of a robust economy, especially with the Commerce Department announcing a 4.1% increase in GDP during the second quarter, which was spurned by a mix of tax cuts, deregulation and spending increases.
The Fed expects GDP to rise 2.8 percent for 2018 in the aggregate, but diminish to 2.4 percent in 2019 followed by 2 percent in 2020. Furthermore, the prevailing notion in the capital markets is that Federal Reserve Chair Jerome Powell and the FOMC are set to raise interest rates two more times through 2018.
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