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Affluent Investor | June 25, 2017

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Yellen’s Testimony Suggests Rates Will Rise This Year

Photo: Andrew Harrer/Bloomberg via Getty Images

Photo: Andrew Harrer/Bloomberg via Getty Images

In her recent testimony to the Senate and House, Janet Yellen ruled out an interest rate increase in the immediate future. However, she hinted that a rate increase would occur this year. This was largely in line with the thinking of most economists. Not many economists were expecting a rate increase prior to June. One prominent economist I met with recently said the process will be gradual. He expects the Fed to remove the word “patient” from its March statement and to introduce the first of several increases in the fed funds rate in September.

The economic data suggest that Yellen can be patient for the time being. After all, the Fed sees no need to raise interest rates as long as the employment market is weak and there is little inflation. Some would argue that the improvements in the employment market should prompt the Fed to start raising rates soon.

While it is true that the unemployment rate has been falling, there is no evidence of wage inflation. Furthermore, the decline in the unemployment rate is largely illusory because the participation rate is at a four-decade low. And most of the jobs being created are in the lower wage categories.

As for price inflation, the latest report on the Consumer Price Index showed a 0.7% decline. However, the decline was due almost solely to falling energy prices. Excluding food and energy, the CPI went up at an annual rate of 1.6. That’s a little less than the Fed’s target of 2.0%, but it is consistent with the argument I made in my January 23 post that falling energy prices could be inflationary if they spur economic growth and an increase in demand for goods. The Fed understands this. That’s why Janet Yellen is hinting at a rate increase this year even though she can exercise a little more patience in the near term.

 

Read Vahan’s blog at Janjig.com.

Vahan Janjigian is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC Registered Investment Adviser, where he manages portfolios for clients in separate accounts. Dr. Janjigian is a former Forbes magazine columnist and former Editor of the Forbes Special Situation Survey. According to Hulbert Interactive, his stock picks returned more than 18% annually during one of the market’s worst 10-year periods.

Dr. Janjigian holds the Chartered Financial Analyst designation and has earned degrees in general sciences and finance from Villanova University and Virginia Polytechnic Institute and State University (Virginia Tech). He previously served on the faculties of several universities, including the University of Delaware, Northeastern University, the American University of Armenia, and Boston College, where he taught courses in corporate finance, financial theory, investments, accounting, and economics; and he currently teaches a seminar on equity investment management to business executives in Singapore through Baruch College’s Zicklin School of Business. Dr. Janjigian has served as an expert witness on matters involving portfolio management, churning, suitability, and hedge fund manager compensation.

Dr. Janjigian has published his research in numerous scholarly and professional journals; and has been quoted in many leading newspapers and magazines, including Barron’s, Forbes, The Wall Street Journal, and USA Today. He appears as a guest commentator on various television and radio networks, including Fox, CNBC, MSNBC, and CBS Radio. Dr. Janjigian is the author of Even Buffett Isn’t Perfect (published by Penguin) and co-author of The Forbes/CFA Institute Investment Course (published by Wiley).

 

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