‘Yellen will regret slow pace of rate hikes’

NEW YORK. — Federal Reserve chairwoman Janet Yellen is being too cautious about raising interest rates, and will come to regret the slow pace of hikes when the labour market and inflation overheat next year, says Stephen Stanley, chief economist for Amherst Pierpont Securities and the winner of the Forecaster of the Month award for March.

Stanley, who’s won MarketWatch’s monthly forecasting contest 10 times, is bullish on the economy and hawkish on monetary policy. He thinks the economy is stronger than Yellen and her dovish colleagues at the Fed are willing to admit.

He thinks the Fed should have raised the federal funds target rate (now in a range of 0,25 percent to 0,50 percent) above 1 percent by now, but even he can’t see the Fed raising rates more than twice in 2016.

That slow pace will put the Fed seri- ously behind the curve with the economy at full employment and with inflation breaching the 2 percent target.

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The Fed will be forced to pick up the pace. Stanley expects the Fed to raise rates five times in 2017 and five more times in 2018 in order to keep the econ- omy from overheating too much.

Inflation is likely to approach 3 percent by the end of 2017.

“I look for GDP growth to return to a solidly above-trend pace over the balance of this year as the inventory correction winds down, the pace of deterioration in net exports moderates, and the drag from oil and gas production declines lessens.

“Labor markets are only going to get tighter, and wage gains are likely to move substantially higher,” Stanley said.

Yellen has argued that global economic and financial fragility poses a significant threat to the US economy, which is why the Fed is going so slowly. But Yellen’s concerns are “excessive, Stanley said.

The turmoil in US markets and in overseas economies last summer and at the beginning of this year didn’t have much impact on the real economy, he says. The Fed should just “suck it up at some point and go,” he said.

“The lesson of the December lift-off is that the Fed can engineer a smooth rate move if it just communicates clearly and prepares the markets well,” he said.

Competing against 47 other forecasters in the March contest, Stanley had the most accurate forecasts on four of the 10 indicators we track: non-farm payrolls, retail sales, durable goods orders and the consumer price index.

His forecasts on four others were among the 10 most accurate.

The runners up in the March contest were independent forecaster Brian Jones, Avery Shenfeld’s team at CIBC, Jim O’Sullivan of High Frequency Economics, and Brian Wesbury and Bob Stein of First Trust.

The median forecasts that MarketWatch publishes in the economic calendar come from the projections of the 15 forecasters who have scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner.

Over the past 12 months the top forecasters are, in order, Spencer Staples of EconAlpha, Jim O’Sullivan of High Frequency Economics, Haseeb Ahmed of White Pine Capital, Avery Shenfeld’s team at CIBC, Millan Mulraine at TD Securities, Stephen Stanley of Amherst Pierpont Securities, Lewis Alexander’s team at Nomura Securities, Maury Harris’s team at UBS, Stu Hoffman’s team at PNC, Paul Mortimer-Lee’s team at BNP Paribas, Lou Crandall of Wrightson ICAP, the team at Briefing.com, Gregory Daco at Oxford Economics, Ian Shepherdson of Pantheon Macroeconomics, and Nariman Behravesh’s team at IHS Global Insight. — Market Watcher.