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Okay--What's The Fed's Going To Do Now?

San Francisco Fed. President Janet Yellen
San Francisco Fed. President Janet Yellen

San Francisco Fed President Janet Yellen is considered a dove when it comes to inflation – but she has indicated recently that she still thinks it’s a problem for this economy. So while most economists have been betting on a rate cut coming up on the horizon, is it possible the central bank will hike interest rates soon? David Wyss, chief economist at Standard & Poor’s and Carol Tannenbaum, chief economist at LaSalle Bank/ABN Amro were on “Morning Call” to give their predictions.

Tannenbaum says the economy is in good shape and the Fed has a rate hike in its sights. But Wyss says all we’re seeing is “seasonally-adjusted strength,” mostly due to the warmer-than-usual winter that has led to more houses being built, as well as more people buying houses, cars and others goods. The economy will cool off with the weather, Wyss believes, and then the Fed will cut interest rates – although probably not until midyear.

But if you were outside this morning in just about any corner of the country, it’s clear – winter is here, and oil prices are beginning to reflect that. But Tannenbaum says there are more than just seasonal factors that affect the economy. He points to the strength in wages and the job market that is creating permanent spending power – something the Fed can’t ignore as a strong economic indicator. He also says most of the bad housing news is behind us - and the Fed has nowhere to go but up.

The fact that the dovish Janet Yellen is worrying about inflation backs up Tannenbaum’s predictions, but Wyss says the Fed has “done enough to cool things off” and they will continue to back off interest rates. The fact is, Wyss says, the housing market hasn’t recovered yet and it won’t in the near future. And while the December increase in wage numbers was worrisome, according to Wyss, it was just a fluke – and there is no sign of wage inflation now.

The bottom line is inflation. If the first quarter shows high average hourly earnings, Wyss says he may change his mind, but he doesn’t expect it. Tannenbaum says a hike is coming, although it won’t be before the second quarter.