Wall Street Journal December 2016

Economic Forecasting Survey Summary

finder.com gives you the expert commentary, influencers, and insights you need to know

November 10, 2016



December 2016 Average Forecast

According to the December 2016 Survey Results

Effective Federal Funds Rate


EFFR Avg. Change in Percentage Points


Every month The Wall Street Journal surveys up to 77 economists to weigh in on major economic indicators and how they will change over the next few years. For December, 62 economists responded. With the Federal Reserve’s board meeting decision to raise the Federal Funds Rate last month and their announcement to increase the rate 3 times in 2017, we take a look at how the WSJ survey results for December 2016’s market expectations stacked up to reality.

98%of surveyed economists

expect the federal funds rate to increase this month

December 2016 Survey: Federal Funds Rate predicted to rise higher to levels not seen since before the Great Recession

Economic optimism is in the air — but so is uncertainty. Over the next two years, the Wall Street Journal Economic Forecasting Survey is predicting a continued rise in the Federal Funds Rate projected to reach 2.07 percent by December 2018 — a rate not seen before the financial crisis ten years ago. Although this shift clearly does not end with last week’s hike, let’s begin there.

As anticipated by most experts, including those who participated in the survey, the Federal Reserve raised the target rate by 25 base points resulting in a 0.50 percent to 0.75 percent target range. The Effective Federal Funds Rate (EFFR) adjusted to 0.66 percent as a result. It’s up 21 points from the 0.41 percent held during the first two weeks of December and really has only moved a percentage point or two since July.

How does that compare with the survey results? Participants were accurate about the direction of the market, but a discrepancy did occur between the forecasted and the actual. The average predicted federal funds rate clocked in at 0.62 percent from WSJ’s December survey, which is 4 points below the actual. In addition, a whopping 90 percent of participants called 0.63 percent, 3 points below the mark.

The Outlier

The one economist who thought
the Fed would lower the rate.

Steven Blitz

0.38% / -.03 ↓

President, CEO
Pangea Market Advisory

The Peaks

Meet the surveyed economists with the highest forecasts
and their predictions.

Nariman Behravesh

0.75% / +0.34 ↑

Chief Economist

Lawrence Yun

0.70% / +0.29 ↑

Chief Economist, Senior VP of Research NAR

What about the predictions for the next two years? While previous WSJ surveys predicted the December 2016 rate hike regardless of election results, the market tear Wall Street has enjoyed since the Trump victory has caused the need to deter inflation with the latest rate rise. As the Federal Reserve raises interest rates only when it believes the need to curb economic growth to deter inflation, this month’s rate rise is a signal that there is growing confidence in the market.


Source: Wall Street Journal

Although December’s Fed hike was predicted by the December 2016 survey with near unanimous results, the same survey’s projections for June 2017, December 2017, June 2018, and December 2018 carry much more variance. This is increasingly true the further away in time the prediction and quite a departure from the consistency we’ve seen in the interest rate since 2008.

Standard deviationLowAverageHigh
December 2016±0.050.38%0.62%0.75%
June 2017±0.170.63%0.91%1.38%
December 2017±0.270.63%1.27%2.13%
June 2018±0.410.88%1.68%2.88%
December 2018±0.550.88%2.09%3.90%

All generally agree that the Federal Funds Rate will continue to rise, but by how much is certainly up for debate. The market is clearly responding to Trump’s promises, but will it bear fruit, increase GDP, and bring livable jobs? We will examine this and the many contributing factors in the following section.


Source: Wall Street Journal

Expert Commentary

Bernard Baumohl

Chief Global Economist

Dec. 2016Jun. 2017Dec. 2017Jun. 2018Dec. 2018

Bernard believes the fed hike was the right move but also has pressing concerns over the “euphoria”:

Although it’s difficult to quantify, there are reasons to believe that Trump’s presidency may be crippled from the moment he enters the White House. Congressional and possibly even FBI investigations into his massive business relationships could greatly hamper his ability to govern, even if he hands his business over to his children.

The U.S. economy will grow faster in 2017, but not as fast as Trump expects. I believe that next year the pace of U.S. economic growth will be just slightly stronger than what we’ve witnessed in 2016. I’m expecting GDP growth to be 2.4%, compared to 2.0% in 2016.

Since Trump’s election, Wall Street has demonstrated lots of euphoria and optimism about the economic outlook, yet no one really knows what kind of tax cuts or increases in federal spending we are going to see. The glee even extended offshore and affected both Europe and Japan in the same way it has the United States. However I don’t believe there are sufficient grounds to smile and uncork Champagne bottles. Donald Trump’s proposals threaten to explode the annual deficit and swell the overall national debt. I believe Congress will ultimately water down his tax and spending plans, and we could therefore see significant slippage in the stock market as a result.

More WSJ Survey Metrics: Piecing together why the Federal Funds Rate is now expected to keep rising

The Fed raises interest rates when inflation becomes more of a concern than unemployment and low income rates. This is in an attempt to curb the possibility of a recession. A number of economists have had this concern for the past few months hoping the FOMC would make good on their suggestion that they’d raise interest rates several times in 2016. However, with the election in limbo, stock market volatility, and nominal wage growth still not recovered to the wages seen before the financial crisis, many assumed the FOMC would wait until December to raise rates. Let’s look at the other survey results to fill in the picture. This includes unemployment, CPI, post-election sentiment, GDP, 10-year note yield, and oil prices.

Weeks before the December Fed meeting, nominal wage growth still had not recovered, but unemployment rates steadily dropped. They’ve been in range of the target 4.5-5.0 percent since December 2015 and are anticipated to hit 4.7 percent this December 2016 according to the December survey.


Source: Wall Street Journal

Meanwhile, signals that inflation will be an increasing problem are multi-fold:

1. CPI is rising. The consumer price index (CPI) has risen one base point each month since July and is expected to leap to 1.9 percent this month according to the WSJ survey results. This index is often used as a measure of inflation, however, it’s not the metric the Fed uses to measure inflation. It uses the Personal Consumption Expenditure (PCE), which lately has been slow to reflect the inflation of the CPI.


Source: Wall Street Journal

2. GDP predictions lean upside. Although 58.4 percent of those surveyed believe economic uncertainty has risen post-election, none can ignore the stock market tear that’s rallied over the past month. Trump’s promise for a massive infrastructure plan, tax cuts and deregulation have largely led this boom, but what will actualize is yet to be seen. Still, this could lead to a rise in GDP and uncontrolled inflation.


Source: Wall Street Journal

3. 10-year note yields may continue to rise. 10-year note yields have already seen a spike since Trump’s victory, with the predicted growth and inflation makes bonds unappealing to investors. In addition, Trump’s plan is expected to balloon the national deficit further lowering bond prices and increasing yields. According to the survey, we will continue to see this inflationary reaction to Trump’s proposed policies.


Source: Wall Street Journal

4. Oil prices ratchet up. When the survey was conducted in November, speculation that OPEC was going to reach a deal at the end of November to limit oil production likely contributed to the survey projection that the price per barrel would rise in December 2016 and the next couple of years. This increases the cost of nearly all goods and is another driver for inflation concerns. Of course, we now know OPEC did indeed reached a deal on November 30th to limit production, something that has not occurred in eight years. This decision sent oil prices soaring and has been compounded by OPEC’s success in corralling other non-OPEC countries (including Russia) to throttle production.


Source: Wall Street Journal

The Consequences for Everyday Americans

So what’s the big deal? From buying a home to jobs and politics, the outcome of the Federal Reserve’s meeting can have real impact on our economy and you.

  • This will affect those considering purchasing a home and locking in interest rates. Higher rates make it more expensive to borrow money, so if you’re concerned about higher rates, now might be a good time to lock in a 30-year fixed mortgage.
  • A rate hike will also affect those with adjustable-rate mortgages (which make a very small proportion of loans), and those with adjustable-rate savings – an increase will mean bigger returns.
  • Interest rates will also influence your 401(k), but the result will depend on your investments.
  • Wages still have not recovered from pre-Great Recession levels. It’s possible that this rate hike could exacerbate this.

Sources: The Wall Street Journal Economic Forecasting Survey (and graphs), Daily Federal Funds Rate

Disclaimer: finder.com provides this analysis entirely independent of the Wall Street Journal. We strive to provide our readers with the tools to understand how money affects the world around them.

Survey Glossary

The Federal Reserve

The Federal Reserve is the US central bank and is made up of 12 regional banks across the United States in major cities. The money kept at these banks are called federal funds. The US treasury also keeps a bank account with the federal reserve. In other words, US tax dollars are kept there. In addition, it is run independently by the presidentially appointed Federal Reserve Board (FRB), the partially presidentially appointed Federal Open Market Committee (FOMC) and numerous privately owned US member banks, and various advisory councils.

Gross Domestic Product (GDP)

The GDP is the measure of the value of goods and services an economy (country) actually produces per year. Most countries grow around 1 to 3% annually. This is arguably the most commonly used economic indicator, kind of like the ‘grandfather’ of economic figures. When we talk about economic growth, we are referring to GDP.


Inflation is best defined as gradual increases in the price of goods and services. As economies grow, naturally inflation tends to be a side effect. As an example, say you drive a truck for an fruit trucking company and gets a well-deserved raise. Your company needs to get the additional money to cover his raise from somewhere and increases their prices a tiny bit. All the apple farmers who use the same trucking company to move their produce will also now need to charge a tiny bit more to make up for the increase in logistic costs. This then may cause an increase in other products to match the slight increase in the cost of apples. Ultimately you, despite his pay rise, can only buy the same number of apples as he could before. It’s time to ask for another pay rise! This is inflation. This cycle of inflation happens constantly with a vast array of goods and services. A level of around 2 to 3% inflation is considered healthy and is actually encouraged in most countries.

Consumer Price Index (CPI)

Sometimes inflation can get out of hand, and some goods can become far too expensive, causing unintended effects across the economy. Therefore, there are agencies set up to record an economic indicator called the “Consumer Price Index”. This is a monthly measure of the cost of a standard basket of goods – the kinds of things the average American family purchases regularly. With the CPI, we can track the cost of goods to the average American family over time.


This figure represents the proportion of people who are currently looking for a job, but can’t find any work. The unemployment rate does not include those who have stopped looking for work. Generally speaking it doesn’t include homeless or undocumented people either, especially if they’re not actively looking for work. Unemployment is an important economic measure, as it shows the strength of the jobs market, and the availability of jobs.

Oil Prices

Oil is essential in modern society. We use it to fuel all transport as well as much manufacturing. Oil from the ground is also used in many manufactured goods such as anything made from plastic. Oil prices change depending on demand and supply, and are heavily dependent on world events. The change in oil prices will directly affect transport, energy and manufacturing costs, and therefore directly affects the economy. The introduction of fracking (obtaining oil from underground rocks) in the US has led to a huge increase in onshore production, and has contributed to a reduction in oil prices. The US is now the largest producer of oil in the world, just ahead of Saudi Arabia.

Federal Funds Rate

This is the interest rate which banks charge each other. Banks lend to each other in overnight funds, and the rates they lend to each other at directly affect the rates consumers pay for their loans. This rate is strongly influenced by a committee at the Federal Reserve, the Federal Open Market Committee, who determine a target federal funds rate. The primary tool the Fed uses to meet this target is by controlling the discount rate (the interest rate at which banks can borrow from the Federal Reserve). It is often set higher than the target to encourage banks to borrow from each other, which causes them to adjust their interest rates, the federal funds rate, as a result.

Effective Federal Funds Rate (EFFR)

This is often used interchangeably with federal funds rate, but should not be mixed up with the target federal funds rate, which confusingly enough is sometimes used interchangeably with federal funds rate. Using the term, effective federal funds rate (EFFR) makes it clear you are talking about the actualized interest rate used between banks when lending overnight funds to each other. ultimately determined by the interbank market as they set interest rates for each other when lending overnight funds.

10 Year Note

This is a treasury note that matures in 10 years. A treasury note is a ‘debt obligation’ that can be purchased directly from the US Government. The US Government promises to pay back this loan with interest at the agreed interest rate. The money raised from selling this type of loan is used to fund Government spending, welfare, infrastructure etc. These notes can be traded amongst note-holders, and there is a secondary market attached. While you can purchase notes for different time periods (3 years, 5 years and even 30 years), the 10 year is the most commonly watched and commented on. This affects consumers who are considering purchasing a home. As the yield on the 10 year note rises, so do interest rates, meaning it becomes more expensive to pay the interest on a home loan. This may also affect home prices. It also directly correlates with the 10 year bond market, since the bond is the investment made by the lender of the 10 year note.

Home Prices

The growth of home prices is an important economic indicator, as this affects homeowners’ wealth, and ultimately how much people consume within the economy. It’s important to note that there are many other factors that come with home prices, such as the construction and homebuilding industries, as well as the infrastructure that comes with property market growth. Also, it’s important to monitor home prices alongside wages, as this may affect affordability for those planning on entering the property market.

Housing Starts

The housing market is one of the pillars of any economy – the growth in new housing and the ability for Americans to purchase their own home is a crucial part of that. The housing starts figure measures the construction of new property. This data comes out monthly and shows building permits and construction data in the four major regions (Northeast, Midwest, South and West).

Nonfarm Payroll

Nonfarm payroll is a monthly report generated by the Bureau of Labor Statistics intended to represent the total number of paid US workers of any business. The report excludes workers from general government jobs, private household jobs, employees of nonprofit organisations and farm employees. It comes outon the first Friday of the month and is used to assist the government policymakers and economists with determining the current state of the economy and predicting future levels of economic activity. The statistics from the nonfarm payroll show which sectors are generating the most employment additions.

Ask an Expert

You are about to post a question on finder.com:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, read the PDS or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms and Conditions and our Privacy Policy.