March 3, 2017
Likely cuts in both individual and corporate income tax rates along with simplification of the tax codes, combined with repatriation of corporate earnings currently locked overseas and huge investments in spending on infrastructure, should boost GDP growth in 2017 to 2.4%. Given that the economy is at full employment that faster pace of growth will probably boost the CPI to 3.1% and the core CPI to 2.5%. Higher inflation will push long-term interest rates higher with the 10-year hitting 2.9% by the end of 2017 and mortgage rates climbing to 4.5%.
With GDP expanding at a pace at roughly its potential and inflation only slightly above its target, the Fed will not feel compelled to rush into any further tightening. It needs to do so to get itself into position to lower rates when the time comes, but it appears to have the luxury of taking its time. We expect three rate hikes in 2017 which would put the funds rate at 1.25% by the end of this year.