GSU Expert Predicts March Rate Increase

Rajeev Dhawan

ATLANTA-Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business questions the Federal Open Market Committee’s (FOMC) December dot chart in which the Federal Reserve calls for three rate hikes in 2017.

“Expect one rate increase this March before the trade ruckus breaks loose,” Dhawan wrote in his quarterly “Forecast of the Nation,” released Feb. 22. “The Fed will stand pat until the storm blows over. Then, they will resume their hikes. Growth numbers support this in 2018.”

President Donald Trump’s talks on trade are concerning to members of the Fed as well as to economists like Dhawan.

“President Trump has been sending a clear message to our trading partners, especially Mexico, China, and Germany, that running a trade surplus with us will cost you,” Dhawan said.

Trump’s tough talk on trade has contributed to the strengthening of the dollar which makes American goods more expensive and creates larger trade deficits with these countries. As a result, Dhawan expects the president to use his executive power to impose tariffs. The executive branch can impose tariffs for up to 150 days without congressional approval, and Dhawan expects the president to use this authority.

These actions also will have an impact on interest-rate-sensitive sectors.

“In a trade skirmish, other entities, especially foreign investors and Asian central banks, may decide to withhold buying treasuries,” Dhawan said. “As a result, interest-sensitive sectors such as housing starts and auto sales, as well as corporate investment, will experience subpar growth.”

Dhawan doesn’t see this lasting for long. He predicts that tariffs and trade restrictions will last for six months at most, with no serious reaction from China.

“We don’t have a substitute for Chinese-made products in the short run (or even the long run), and Mexico is extremely integrated into automakers’ supply chains,” said Dhawan. “Both sides will huff and puff but back off from a mutually injurious trade war.”

According to Dhawan, China is more concerned about keeping its factories running and people employed than hits from any potential short-term tariffs imposed by the U.S. A weakening Chinese yuan would make goods cheaper and keep Americans buying.

These trade skirmishes are expected to be over with by the end of the year, Dhawan said.

“The trade impediment not only gets reversed,” he said, “but also comes with a Christmas present for the general populace in the form of the long-delayed, promised personal income tax cut.”

This will boost overall GDP growth to 2.3 percent in 2018 and a better 2.5 percent in 2019.

Highlights from the Economic Forecasting Center’s National Report

  • Following GDP growth of 1.6 percent in 2016, the economy will expand at 2.2 percent in 2017, 2.3 percent in 2018 and 2.5 percent in 2019.
  • Business investment fell by 0.4 percent 2016. Expect positive growth of 3.8 percent in 2017, 4.3 percent in 2018 and 4.7 percent in 2019. Jobs will grow by a monthly rate of 157,000 in 2017, 150,000 in 2018 and 148,000 in 2019.
  • Housing starts will average 1.192 million units in 2017, rise to 1.222 in 2018 and 1.267 in 2019. Expect auto sales of 17 million units in 2017, 16.6 in 2018 and 16.3 in 2019.
  • The 10-year bond rate will rise to 2.9 percent in 2017, 3.4 percent in 2018 and 4.1 percent in 2019.