Everything's hinging on inflation right now

Last week, Wall Street investors focused on the semi-annual Congressional testimony of Janet Yellen, the Chair of the Federal Reserve (our nation’s central bank). They hoped to get a better idea of the Federal Reserve's plans for future short-term interest rate hikes. Ultimately, Chair Yellen indicated that future moves would be dependent on inflation. She stated the Federal Reserve expects the strong job market will lead to higher inflation as more people find work. However, there is little inflation in our economy today. This is important because the Federal Reserve has a goal of 2% inflation, but its preferred inflation measure is only 1.4% over the past year. This is one reason some economists are skeptical that the Federal Reserve will raise interest rates again this year. 

After Chair Yellen's testimony last week, the latest economic data released suggests inflation is likely to remain low. Economists had been expecting consumer spending to rise in April, May, and June compared to the mediocre spending in the first three months of 2017. Unfortunately, this has not materialized as expected. Total retail sales fell in June, and the lack of spending not only suggests inflation will remain low, but it also points to a slightly slower-than-expected growth rate for the U.S. economy in the second quarter (April, May, and June). While the initial estimate of the Gross Domestic Product (GDP) growth rate for the second quarter won't be released until Friday, July 28th, economists are currently estimating growth of 2.5%.  The GDP is the total value of good produced and services provided during one year.

Currently, there’s only a 43% chance of one more interest rate hike in 2017. Simply Money Advisors continues to believe that another hike is more likely than not, though. And over the next couple of years, we believe the Federal Reserve will continue to raise interest rates slowly. The economy is currently strong enough to handle these moves. The time to worry is when the Federal Reserve's policies start to slow down the economy – and we’re not even close to that point right now.

The Simply Money Point 

At Simply Money Advisors, we understand you may be worried that the long-running economic expansion and stock market gains could turn at any moment. But remember, these things do not have preset ‘expiration’ dates. We will continue to watch economic indicators (such as housing, jobs, manufacturing) for signs of a change in direction.