Kids these days. This year’s class of high school seniors doesn’t remember the 2000 presidential election, the dot-com bust or the terrorist attacks of September 11. They were in elementary school during the late-2000s recession, and their entire adolescence was spent amid the backdrop of zero-bound interest rate policy. (Not that soft monetary policy is the type of thing that tends to make one wax nostalgic for high school, but I digress.) So it makes sense that a student from a central New Jersey high school, when quizzed by CNBC senior economics reporter Steve Liesman on the Fed’s moves in June, would say, “Hold rates steady.”
“You heard it here first, people!” the financial news personality quipped as the preroll was airing for the 16th annual National Economics Challenge on May 23, organized by New York–based educational nonprofit Council for Economic Education and aired during CNBC’s Power Lunch. This year’s competition featured more than 10,000 students from 44 states. The top four highest-scoring teams in two divisions got an all-expenses-paid, three-day trip to New York. (The CEE invited me to the event, held at Scandinavia House in Manhattan’s Murray Hill neighborhood, out of appreciation for my online treatise back in January on behalf of K–12 economics education in the U.S.) In two-team face-offs, high school students hit the buzzer — occasionally before Liesman read the entire question — to get the chance to answer questions such as “What model measures the relationship between inflation and the unemployment rate?” (Answer: the Phillips curve) and “What three index measures does the Federal Reserve monitor when analyzing inflation?” (Answer: the consumer price index, the producer price index and the GDP deflator).
The student competitors got both of those correct at the first ring of the buzzer. Questions following up on those questions, on the other hand, might take more than 15 seconds to answer: “When will the Fed hit the button on interest rates already?”
Granted, this has been a quandary for, well, several years now. Since the Fed released the minutes of its April meeting on May 18, though, policymakers and markets might finally have something worth buzzing about. Federal Open Market Committee (FOMC) members, including James Bullard and William Dudley — who gave one of the NEC competition questions via video — have intimated that the U.S. economy might finally have enough lilt to support a slight interest rate hike as early as the Fed’s meeting in July, rather than in September, as many analysts were expecting.
“If I am convinced that my own forecast is sort of on track, then I think a tightening in the summer is a reasonable explanation,” Dudley said at a May 19 press briefing. Markets were quick to price in a potential hike, with U.S. equities tipping down for the rest of that workweek and the U.S. dollar edging up against major currencies. Numbers on fed funds futures contracts from the CME Group suggest that in light of the latest Fed minutes, investors are predicting a 30 percent chance the Fed will hike in June, rather than 18 percent a couple of weeks ago.
The unemployment rate is hovering around 5 percent — a level most economists consider to be approaching full employment. Recent industrial production and retail data have been looking up. So what’s the wait?
For one, policymakers like Fed governor Jerome Powell have noted trepidation over a potential U.K. exit from the European Union, as well as fears over mounting debt in China. Others, including Bullard, have also mentioned the Brexit referendum on June 23 — one week after the next Fed meeting — as a possible concern.
There’s also the homegrown issue of sluggish inflation. The core personal consumption expenditures index, which excludes food and energy, was 1.6 percent in March, down from 1.7 in February and even further away from the Fed’s 2 percent target. Nonetheless, domestic issues don’t operate within a vacuum. In its March announcement, Fed policymakers lowered the 2016 forecast to 1.2 percent, mentioning risks such as volatility in China as a possible weight on Stateside economic growth. That is to say, the policy doves, led by chair Janet Yellen, prevailed, with a perceived need for caution winning out over economic models such as the Phillips curve. Yet even Dudley, perhaps the most dovish of the FOMC dozen, sees rate hikes in the Fed’s near future.
The question on Fed policy is looking to be more if than when. Policymakers have waited to hit the buzzer long enough to come up with an answer. High school econ students need to keep their interest piqued.
Follow Anne Szustek on Twitter at @the59thStBridge.
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