The Fed's Gradualist Approach: Aneta Markowska on Interest Rate Hikes and Economic Stability

The Federal Reserve is expected to raise interest rates for the first time since 2006, marking a significant step in the normalization of monetary policy. Aneta Markowska, the chief U.S. economist for Societe Generale, believes that the Fed's gradualist approach will be a net positive for the economy, despite creating some tension in the credit market.

Key Takeaways:

• The Fed's decision to raise interest rates will be a positive for the U.S. economy, with Markowska predicting a 1% increase in GDP growth next year.
• The Fed will likely adopt a gradualist approach, with a focus on tying policy to the neutral real rate and slowing down the pace of tightening.
• Markowska expects the Fed to bring down the longer-run estimate of the federal funds rate to 3.25%, and possibly to 3.5% in 2017.
• The consumer economy is performing well, with real final demand expanding at 2.8% in the third quarter, despite being dragged down by weak external demand.
• The external track is expected to remain weak, but should diminish at the margin, allowing for increased domestic growth.
• Markowska believes that the Fed's cautious approach will help to avoid significant disruptions to the economy, but notes that there is a risk that waiting too long to hike rates may lead to higher valuations in the market and more imbalances in the financial system.

Statistics:

• Real final demand expanded at 2.8% in the third quarter.
• The external track has dragged down 7/10 of GDP growth over the past few quarters.
• The longer-run estimate of the federal funds rate is expected to decrease to 3.25% (from 3.5%).
• 2016 dots will remain moderately unchanged, while 2017 and 2018 dots will likely reflect four hikes next year.
• The neutral real rate is expected to normalize slowly.

Sources:

• Societe Generale
• Aneta Markowska, chief U.S. economist, Societe Generale
• Bloomberg LP
• 2015 CQ-Roll Call, Inc.