Inflation expectations will weigh on Fed tightening

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Inflation expectations will weigh on Fed tightening. 3.75% will be the long-term funds rate. If we look at the last 7 cycles where the Fed started raising the funds rate inflation and growth was significantly higher than what is currently forecast. The Fed themselves are predicting inflation to run at 2% to 2.3% over the long-term, thus we need to adjust our 'neutral' rate accordingly. On current projections of inflation, but more importantly inflation expectations, as well as unemployment it's hard to make a case that the funds rate will be much higher than 2%. Prophesising into 2017 is tough and given the political issues (with the Greek and French elections) that could cause a massive loss of confidence in Europe this could really impact the US economy given 16% of US exports make their way to Europe. Still on current projections I feel that the funds rate could be raised to 2% to 2.5% by early 2017.


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