US Outlook Report: Three Trends to Watch for in 2015
Number One: Rising Interest Rates. For the first time since 2006, the Federal Reserve is signaling that they will raise the Fed funds target rate, their key monetary policy interest rate, sometime next year. As of today, it appears the FOMC is penciling in a second-quarter 2015 liftoff date (most likely June 2015).
We expect the U.S. money and bond markets to immediately start pricing in a higher probability of higher rates in 2015 and 2016. Since September the bond and money markets have pretty much been discounting most of the guidance the Fed has given on interest rates for next year. Over the last two days alone that has begun to change. The 10-year Treasury yield has risen 19 basis points, back up to 2.20 percent from a low of 2.014, and the entire Treasury yield curve has shifted noticeably higher.
Number Two: Lower Inflation. The 40-percent-plus plunge in oil prices and similar steep declines in other commodity prices, along with a sharp rise in the U.S. dollar, will put more downward pressure on consumer prices over the near term. November’s steeper–than-expected drop in the Consumer Price Index, down 0.3 percent on the month, is a harbinger of things to come. We have lowered our forecast for consumer price inflation to an average of 0.9 percent for 2015, down from 1.6 percent in 2014. But outside of volatile food and energy, core-consumer price inflation is expected to remain relatively stable. We are forecasting core-CPI inflation of 1.7 percent for 2015, down just a tenth of a percent from a 1.8 percent core-inflation rate in 2014.
One new nugget of information I got from Yellen’s post FOMC press conference was that even if core-inflation did not improve from current levels that would not deter the FOMC from starting to normalization interest rates.
Number Three: Stronger Consumer. Everything is coming up roses for the U.S. consumer for 2015. The tightening labor market should finally help to firm up nominal wage gains for the average worker, while the decline in inflation will turbocharge their real income growth even more. Household wealth gains have continued uninterrupted and even accelerated in recent months, while debt-to-income ratios have returned to pre-crisis levels, freeing up the consumers’ capacity to borrow and spend. As consumer confidence, jobs, and income rise, consumer credit will become easier to acquire in 2015.
It has been a six-year slog for the U.S. economy to get to this point, but now that we are almost there, it makes our arrival all the sweeter. Happy holidays, everyone; our next U.S. Outlook publication will be on January 2, 2015.
To find out more, check out this week’s US Outlook report.
Tags: economy