A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, Nov. 9, 2018.© 2018 Bloomberg Finance LP
Federal Reserve officials appear to believe they can keep raising US interest rates well into 2020.
There’s just one problem: Financial markets think a slowdown in economic growth from this year’s stimulus-boosted pace will force policymakers to rethink their monetary tightening as soon as early next year.
Here’s the Fed’s most recent “dot plot,” which sketches out officials’ individual forecasts for the likely path of rate increases and shows a median estimate for several hikes next year and into 2020.
The Federal Reserve is forecasting rate hikes well into 2020.Federal Reserve
Steven Blitz, chief US economist at TS Lombard, says a December rate hike is basically a done deal but “the question is 2019. Here, the outlook is less certain than the dot plot suggests.”
After a November meeting that yielded no shift in policy, the Federal Open Market Committee “noted the slowdown in business spending and long ago the statement stopped mentioning the slowdown in housing – which continues to weaken” as per the chart below, Blitz writes in a research note.
The US housing slowdown continues, and a recent softening in business investment may deepen.Lombard TS
“If employment growth starts to slow towards a neutral pace early next year and the unemployment rate creeps up as a result, does the Fed keep going just because wages are accelerating? We doubt it,” he said.
So what does this mean for the federal funds rate, currently in a range of 2% to 2.25%?
“The noted slowdown in business spending will only be further negatively impacted by the strong dollar and higher real rates,” Blitz wrote. “The likelihood is consequently high that a slower pace of employment growth follows.”
As for the Fed’s end-game, adds Blitz: “It looks to us that March will be their last hike, when they declare victory that [the neutral rate] has been reached, at least for the moment.”