Recently Cetera Investment Management wrote a Sightline article about the likelihood of additional Fed rate increases in 2018. The entire article follows below. If you have questions about this article or about your portfolio, please contact myself or Tim Swartley at (267) 384-5300.
Fed Tightening Expectations
Key Takeaways:
- Steady, rising growth and inflation nearing target levels has led the Federal Reserve to raise
interest rates twice this year, with a third hike widely expected in September.
- The Fed left rates unchanged at its August 1 meeting, but upgraded its view on the economy;
thereby hinting that a fourth hike may be warranted in December.
- Despite our current outlook for four rate hikes in 2018, global trade tariffs and other growth risks,
may make the central bank’s fourth quarter rate decision somewhat less certain.
Since ending its zero-interest rate policy in 2015, the Federal Reserve has raised its key fed funds
lending rate a total of seven times, each a quarter-point (0.25%) increase to the current 1.75%-
2.00% range. The most recent hike occurred on June 13 with the Fed’s Open Market Committee
(FOMC) policy statement denoting the resiliency and steadiness of GDP growth, the strength of the
labor market and inflation that is finally nearing the Fed’s target level.
Unemployment remains low, close to levels not seen since 1969. Wages are growing slightly faster
than inflation, with hourly earnings rising 2.7% year-over-year in June. Meanwhile, while the U.S.
economy had expanded at a 2.2% annualized rate in the first quarter, and that pace has nearly
doubled to 4.1% in the first of three-second quarter growth estimates from the Commerce
Department.
With this economic backdrop, the Fed did not raise rates in its August 1 meeting, but did upgrade its
economic outlook to “strong” from “solid.” The CME Group’s FedWatch Tool, now shows near
certain odds for a September rate hike. Assuming the Fed sticks to its “gradual” rate increase
practices of quarter-point hikes, the implied odds for a September 26 rate hike jumped to 93.6%, and
if the Fed determines that a fourth rate hike is warranted this year, it would likely occur in December
with the implied probability rate-hike odds currently at 71.7%.
We believe that Fed Chairman Powell will guide the FOMC toward another gradual rate hike on
September 26. Powell is scheduled to host a press statement that day and the Fed will release an
updated summary of economic projections. While a trade agreement with the European Union has
been reached regarding industrial goods, a much more formidable trade challenge remains with
China.
The United States imports nearly four times more goods than it exports to China, so China does not
have much room for long-term tariff retaliations. China may resort to devaluing its currency to make
U.S. imports more expensive and make Chinese exports less expensive for Americans. A possible
Chinese currency devaluation could give the Fed pause on its fourth rate increase, as a Fed rate
increase would likely cause the dollar to strengthen even further. Because
we currently think a fourth rate hike is likely, we are monitoring trade talks and currency devaluations
as we assess the possibility of more rate hikes.
This report is created by Cetera Investment Management LLC
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