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Komal Sri-Kumar

Be Skeptical of the Fed's Rate Signals

China’s and Europe’s weaknesses may make three hikes in 2017 difficult.
Forward guidance.

Forward guidance.

Photographer: Aaron P. Bernstein/Getty Images

At its last policy meeting, in December, the Federal Reserve decided to increase the federal funds rate by 25 basis points. It also indicated that it expected to increase interest rates three times in 2017, as Chair Janet Yellen painted a rosy picture of the prospects for the U.S. economy that pushed up Treasury yields and hit emerging market equities and currencies hard. Minutes of the meeting released Jan. 4 reiterated the Fed’s expectation of faster economic growth this year.

Yet the reaction of markets may have been premature: The Fed's outlook deserves to be treated with a big dose of skepticism, particularly given the central bank's record in recent years. The Fed has largely gotten it wrong since 2009, as it repeatedly forecast a rapid pickup of the U.S. economy that would be accompanied by several rate increases. In fact, it has raised the federal funds rate by only two baby steps since the 2008 financial crisis, and there's little reason to believe it has now regained credibility.