ARLINGTON, Va. – The Federal Open Market Committee, the monetary policy arm of the Federal Reserve Board, will begin to raise rates earlier and faster than previously thought, NAFCU Senior Economist Jeff Taylor predicted. He said he expects the economy to grow even stronger in the second quarter than the first, putting it up around 5%. “That’s good in a lot of ways but also it brings up specter about the interest rate environment that we’re looking at,” Taylor said. He added that he expects the second half of the year to slow down with year-end growth settling down around 4%. Taylor also said he is looking to inflation to accelerate. “What’s that going to mean for interest rates? I think I’m changing my outlook a little bit for the Fed funds perspective. I think they’ll raise interest rates by 25 basis points this month, the end of June,” he forecast. “Then, depending on the indicators and where the economy’s going, I think there’s a good chance of a 50 basis point hike in August. “I’m not changing my total outlook for total interest rates for the Fed funds: still 100 basis points this year, but instead of the more gradual 25s, I think there’ll be at least one 50 basis point increase.” Taylor explained that the Fed cannot look like it is behind the curve and must increase rates more aggressively than it was originally anticipated. “And I think that will be good for credit unions in a sense that the yield curve will not become as steep if, again, the market perceives the Fed to be ahead of the curve,” he explained. “Right now they’re still perceived to be behind and I think that’s one reason why it will start in June and probably do a 50 basis point in August.” Projecting out into next year, Taylor said, we will be looking at a Fed funds rate around 3.5%.
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