William Strauss, the Senior Economist & Economic Advisor at Chicago’s Federal Reserve Bank, just concluded his manufacturing and economic outlook. During his talk, Bill noted that we are likely to continue to see interest rates at near zero (“We can’t go negative,” he wryly said) throughout the remainder of 2013 and into 2014. He also corrected the common perception that the Fed prints money. It turns out that the Treasury prints our currency, and the new hundred-dollar bill costs 12.5 cents to print. The Fed buys it from the Treasury before putting currency in circulation.
On the topic of Fed policy and the economy, Bill suggests that sometime in 2015, we will see interest rates rise, with a target for the Federal Funds Rate at 1% in 2015 and 2% in 2016. How will the Federal Funds Rate target reflect the overall economy and monetary picture? This is Bill’s forecast:
- The outlook is for the U.S. economy to expand at a pace around trend in 2013 and above trend in 2014
- Employment is expected to rise moderately with the unemployment rate edging lower
- Slackness in the economy will lead to a relatively contained inflation rate
- Growth in manufacturing output should be around trend this year and somewhat above trend next year
During the Q&A, I asked Bill which "black swans" could hit our economy in the coming years and potentially impact this forecast. He said he feels very comfortable with the state of the US financial services sector, thanks to bank stress tests. But his concerns come from Chinese transparency and Europe. If there is a Black Swan out there, it is likely to sail from across the Pacific or Atlantic oceans, coming our way, rather than emanating from within like last time (the mortgage crisis).