Reuters reports that “investors are beginning to question how many rate hikes the Fed can implement next year without risking a slowdown in the U.S., which has held up well so far even as borrowing costs have risen.” The economists’ poll also suggested that three interest rate increases are projected to take place in 2019, consistent with the view of a slower pace of tightening. However, opinions are divided on whether the third hike should take place given that just 53% voted in favour. The poll has still remained unanimous in the view that the Fed will raise interest rates in December.
Those who have been following our articles may feel that this is not something new. In fact, they will remember that this was a prediction I made not once but twice: on October 29 I suggested that “The Fed interest rate hike is correct and it should proceed with another in December in order not to jeopardize its reputation. However, even if the Fed hates doing so, it will be forced to slow down rate hikes in 2019, in the case that the US government pursues with the same policies in the fiscal and external sectors.”, while on November 14 I re-affirmed this commenting that “the Fed will delay interest rate increases in 2019 for as long as it possibly can, in order to allow for the economy to adjust to the new trade war environment.”
To put the argument simply, the stock market drop, as a result of expectations for a further reduction in corporate profits should have proved a wake-up call for US policies, although no change has been observed thus far. To this end, the Fed is not likely to persist tightening at the same rhythm in the coming year, given that it does not want to add unnecessary pressure to the economy, but it is too late to back down from an announced rate hike in December. Naturally, as previously discussed, this would hold as long as there is no major change in US policies.
This is indeed another one of those times when I am justified to say “I told you so”.
Dr Nektarios Michail
Market Analyst
HotForex
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