The Federal Reserve Board raised lending rates by a quarter-point last week amid a sunny forecast for the U.S. economy. This was the first interest rate hike in a year and the last hike before that was a decade ago - before The Great Recession.
The depth of The Great Recession has made this recovery different from others. Federal Reserve Chair Janet L. Yellen, along with her predecessor, Ben Bernanke, have used unconventional monetary tools, like quantitative easing to stimulate the economy, and it's worked.
A raft of new data was reported last week showing the economy is growing and actually has slightly outperformed expectations.
The December 15 reading of the Citigroup Economic Surprise data shows that economists were surprised pleasantly by the stronger than expected growth that was occurring lately without an increase in inflation.
The Fed released its December 2016 inflation forecast on Wednesday, and it did not change much from three months earlier. The Fed tweaked the 2019 inflation rate one-tenth of 1% higher to 2.1%. Fed's forecast uses the Personal Consumption Expense Deflator to make its forecast and set policy targets for inflation.
Of course, the widely-followed inflation number tracked in the press is the Consumer Price Index (CPI), which is shown in this chart. When gasoline prices tanked in mid-2008, the CPI plunged. But it has now fully recovered. The Core inflation rate, which is shown in the red line and excludes food and energy expenses, is higher than the headline inflation, and it is now higher than the Fed's 2% target. While the latest data shows inflation is benign, they are also showing growth.
On Monday, The Wall Street Journal released the results of its latest monthly survey of economists, and the consensus tweaked up the expected growth rates by one-tenth of 1%, from 2.3% to 2.4% growth over the four quarters ahead. A one-tenth of 1% increase is not dramatic but it is in the right direction. With unemployment at a 10-year low, a 2.4% growth rate is widely believed to be about the maximum growth rate the economy can sustain, and it's not bad at all.
Also reported this past week were retail sales figures, which leveled off but were still booming, through the end of November. Retail sales grew 3.8% in the 12 months through the end of November, almost 20% faster than in the 12-months ended October 2007, the previous peak growth rate in retail sales of 3.1%.
While President Elect-Donald J. Trump previously chastised the Fed chair, saying Ms. Yellen "should be ashamed of herself" for keeping interest rates low for political reasons, the President-elect may be rethinking that position now that he is elected. He did not chastise Fed chair Yellen after her 50-minute press conference, even though she reiterated her expectations that Fed tightening over the next few years is expected to be gradual. Politics makes strange bedfellows and this powerful couple of leaders have a common goal of growing the economy.
The Standard & Poor's 500 index of America's largest public companies hit an all-time record high this past Tuesday, before closing out the week lower, at 2,258.07. The S&P 500 is trading at about 19 times its earnings per share over the last 12 months, and stocks are fully valued.
The bull market is old by historical standards and a drop in stock prices could occur at any time. When sentiment changes or unexpected bad news hits - which happens every year or two, historically - some investors become fearful and cash out. However, investor ebullience recently is rooted in data like we saw this past week. Key economic benchmarks are showing none of the signs that normally precede a recession. The 90-month long economic expansion is far from the longest on record in post-War America, and it could continue for many months or years.
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This was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used by as financial advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.