The drop in the national unemployment rate from 8.5 percent in December to 8.3 percent in January made big news nationwide, and seemed to a lot of folks to signify a solidified economic recovery. But if CD investors are hoping the stronger-than-expected employment report will cause the Fed to accelerate its timetable for a rate increase, they may be in for a disappointment.
From Jon Hilsenrath at the Wall Street Journal:
Nomura Securities economist Lew Alexander said the Fed's long-run economic forecast is likely to be the key. The central bank sees inflation dropping below its 2 percent objective in the months ahead. It sees unemployment falling very slowly over the next three years, to between 8.2 percent and 8.5 percent by the end of this year, between 7.4 percent and 8.1 percent at the end of 2013, and between 6.7 percent and 7.6 percent by 2014.
As long as Fed officials expect inflation to come in below 2 percent, and unless unemployment moves convincingly to a faster rate of decline, Mr. Alexander thinks they will stick to their plan to keep interest rates low and could well do even more. A stronger-than-expected recovery would change that, "but I think it is way too early to draw that conclusion," he said.
In case you missed it, the Federal Reserve rolled out its first ever projection of the federal funds rate last month, which showed most of the FOMC members believe a hike should be delayed until 2014 at the earliest.
A hike in the federal funds rate would be a welcome sight for CD investors, because CD rates are closely linked to that key rate, but I agree with Alexander that it's not likely as long as inflation is under 2, or even 3, percent. That's especially true during a presidential election year, when I'd expect the Fed to try to keep as low a profile as possible and avoid any controversy.
What do you think? Will rising inflation or an accelerating recovery force Bernanke's hand? Or are CD rates doomed to stay in the basement until 2014?
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