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The Fed Should Stop Predicting Future Rate Increases

Posted December 16, 2016

There was no surprise yesterday when the Fed announced a modest 0.25% rate increase, which still leaves interest rates at historic lows. The move is not surprising because the US economy is accelerating, the stock market has reached all-time highs, unemployment has fallen lower and faster than expected, and wages are finally increasing.

United States Federal Reserve System symbolThe Fed says it is data driven, meaning they take the economic temperature at their regular meetings every six weeks. They look at trends in employment, wage increases, economic growth, inflation, and other factors. With the Fed announcement yesterday, they predicted three more increases in 2017. I believe this forecasting is a mistake. It contradicts the principle that they are data driven. They do not know what the data will show in six weeks or six months. When they raised rates 0.25% one year ago in December 2015, they forecast that they would raise rates three to four times in 2016, and they only did it once. These missed predictions weaken their credibility. They should just confirm their commitment to the data.

 

This move by the Fed is a vote of confidence in the economy. It does not indicate a need to change your appropriate long-term investment strategy based on your circumstances, needs, and goals.

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