GSU’s Rajeev Dhawan: Decisive Year Ahead for Federal Reserve

ATLANTA — Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s (GSU) J. Mack Robinson College of Business, anticipates that the Federal Reserve will raise the federal funds rate several times this year.

“Three is a safe bet based on my projections for growth,” writes Dhawan in his quarterly Forecast of the Nation report released last week.

The veteran economist expects Jay Powell, who succeeded Janet Yellen in January as the new Fed chair, to set forth the first hike at the next Federal Open Market Committee (FOMC) meeting on March 20-21. But that isn’t a given, according to Dhawan.

Financial Markets ‘Skittish’
Since the beginning of the year, the 10-year Treasury yield jumped nearly 50 basis points and hit a four-year peak at 2.94 percent on Feb. 21. (The latest 10-year rate as of this writing was 2.81 percent.)

The suddenness of the upswing, and the near “correction” (or 10 percent drop) in February of the Dow Jones industrial average may be signaling that it’s not a good time for the Fed to raise short-term rates.

“This first one may get delayed if financial markets are in turmoil,” writes Dhawan. “The recent volatility in markets is of concern.”

Dhawan points out that the already “skittish” financial markets are fearful about inflation. The forecaster notes that the “seed” of this inflation fear was planted with the release of the Jan. 26 gross domestic product (GDP) report, which showed 2.6 percent growth for the fourth quarter of 2017, a drop from 3.2 percent growth in the previous quarter.

“The reason for this slowdown was that hurricane rebuilding efforts lifted third-quarter GDP growth somewhat and faded by the fourth quarter,” writes Dhawan.

The personal consumption expenditure (PCE) deflator, which measures prices paid by consumers for goods and services, also reached a four-year high and came in near the Fed’s 2.0 percent target inflation rate, causing the sell-off in late January.

“What really ignited the fire was the employment report released in early February, which showed not only a solid gain of 200,000 new jobs, but, more importantly, a jump of 2.9 percent in wage growth,” writes Dhawan.

Uptick in Discretionary Income Coming
Despite the fear of a stock market correction, Dhawan says that most consumers should have something to look forward to this year.

“Personal income tax cuts will put more money in most people’s pockets,” writes Dhawan. “Additionally, tightening in the labor market produces wage inflation.”

Dhawan believes that the additional consumer spending because of these gains will stimulate business demand and allow for GDP growth near 3.0 percent in the first half of 2018. Dhawan points to business investment to keep the ball rolling through the rest of the year.

“The tech investment rate is the best predictor of future job and income growth,” writes Dhawan. “It should go up to 8.5 percent in 2018, and, along with an increase in the equipment investment rate, we should see 3.1 percent GDP growth in 2018.”

Three-Year Forecast Calls for Moderate GDP Growth
This expected uptick for the GDP led Dhawan to forecast that the Fed will raise the short-term interest rate two more times this year following the one expected at the March FOMC meeting. He also predicts a moderation in GDP growth for the next couple years — 2.5 percent in 2019 and 2.0 percent in 2010.

Dhawan says that the economy won’t be able to sustain the expected 3.1 percent growth in 2018 because housing starts are unlikely to hit the 1.5 million mark.

“Housing starts will average 1.25 million over the next three years, unable to push higher due to rising mortgage rates and skittish, millennial first-time buyers,” writes Dhawan, who also says that GDP could be manipulated higher if vehicle sales also increased.

“But, if you have used every trick of financing to give subprime borrowers a vehicle in the last five years, you can’t milk this avenue anymore as rates rise,” writes Dhawan. He expects vehicle sales to total 17.1 million units in 2018, 16.4 million in 2019 and 16.1 million in 2020.

— Staff Reports

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