If 2014 taught investors anything, it’s not to obsess over the Federal Reserve’s moves.
As we enter 2015, Wall Street expects a rate hike this year, making the Fed the center of attention. It’s easy to understand why, given the federal funds rate has remained at nearly zero for six years and hasn’t been bumped up since 2006.
"I think the Fed probably will tighten sometime in 2015," said Bob Johnson, director of economic analysis at Morningstar, in an interview with TheStreet. "The Fed has not been very helpful in trying to predict things in 2014. Economists thought rates would be up a percent in 2014, but instead the 10-year Treasury yield is down a percent, so I’d be a little careful following the Fed too closely because it may not be the most relevant benchmark anymore."
The Fed insists its decisions are data driven. Thanks to low gas prices, inflation has been falling away from the central bank’s 2% target, a clue that a jump in rates may not happen so soon.
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"I think we’re at the bottom with oil prices and I think prices will generally go up in 2015, which will push inflation to 1.8%-2%, which is quite an acceleration from the rate we’ll probably have for 2014, which is 1%," Johnson added. Crude prices have dipped 50% since June 2014.
Still, inflation even slightly below the Fed’s target could delay a rate hike.
"If inflation is under good control, that may hold them back a bit, but I’d caution the Fed – just because oil prices are low, they shouldn’t wait too long to raise rates, because once the door is open we could be really stuck and it could be hard for the Fed to catch up," he told TheStreet.
The Fed will also be watching wages, which have struggled to move past its roughly 2% annual increases.
"It’s very interesting to see that growth in the hourly wage rate has never been very high," Johnson noted in a report. "In fact, the average wage rate was almost non-existent for a stretch of time from 1974 to 1994."
He said the aging workforce should push wages up over the next few years.
This article was republished with permission from TheStreet.