There is a high probability that the FOMC will hike rates at its December meeting, and a similarly strong chance that it will raise rates more in 2018 than the market anticipates. But for now, the markets seem more focused on whom President Trump will appoint as the next chair and vice chair.
We expect the US Federal Reserve to keep policy rates unchanged at the November meeting of the Federal Open Market Committee, with the federal funds target range remaining at 1-1.25 per cent. However, we assign a high probability that the Fed will raise rates by 0.25 per cent at its December meeting, which would be the fifth quarter-point increase since the Fed began hiking interest rates in December 2015.
Overall, we believe the market is too complacent about the number of potential Fed rate hikes in 2018. Fed fund futures show that the market has priced in just over one rate hike next year, but we would not be surprised to see the Fed deliver two or three increases in 2018.
The US economy is exhibiting signs typical of an economy in the late stages of an economic cycle. Wage growth continues to accelerate as labour-market slack is eroded, driven by the economy approaching full employment. The effects of a weaker US dollar have been causing survey-based inflation indicators to climb as the US imports inflationary pressures.
We expect headline inflation to reach 2.0 per cent in November and 2.4 per cent by next summer, providing the Fed with some comfort when hiking rates in 2018. We still find Treasury inflation-protected securities (TIPS) to be attractive investments, given our view that inflation is likely to continue to surprise to the upside.
US domestic demand has been supported by an ongoing tightening in the labour market and easy financial conditions. From a bottom-up perspective, we are also seeing positive – albeit patchy – signals for capital expenditures.
We expect growth to hover in a range between 2 and 2.5 per cent. However, if President Donald Trump’s administration succeeds in pushing through a fiscal stimulus program – consisting of tax cuts and infrastructure spending – it will help to sustain above-trend growth for an extended period of time, which should prolong the economic cycle.
New Fed chair and vice chair
Market participants are anxiously awaiting President Trump’s decision for the next chair and vice chair of the Federal Reserve – a decision that is expected to occur before his trip to Asia on 3 November. Recasting the leadership of the central bank is a priority for Mr Trump and his advisers, who want to reduce the Fed’s discretionary authority. In their view, replacing Chair Janet Yellen and Vice Chair Stanley Fischer will be a key step in correcting the regulatory over-reach that has extended the operations of the central bank well beyond its legislated missions.
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BoE Could Hit Headwinds After First Hike in 10 Years
A November rate hike has been on the cards since the BoE’s meeting in mid-September, but the more pertinent question is what happens next. Is this a “one-and-done” event or the beginning of a traditional hiking cycle?