Before its third interest rate hike last month, the economy was charging forward vis-à-vis an American muscle car in a street race driven by a strong stock market that has seen the major indexes like the S&P 500 reach record levels. However, with volatility rearing its ugly head to start the fourth quarter of 2018, the Federal Reserve might be thinking twice when it comes to raising rates in order to keep up with the pace of the economy.
“And while I wrestle with that choice, one thing seems clear: there is little reason to keep our foot on the gas pedal,” Atlanta Federal Reserve President Raphael Bostic said in a speech to business leaders in Baton Rouge, Louisiana.
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After last month’s announcement that the Fed is hiking rates by 25 basis points to 2.25, Fed Chairman Jerome Powell proceeded to receive a battery of questions regarding the health of the broad economy, but in particular, he also had to address the trade wars, particularly between the United States and China. Market analysts are prognosticating that an escalation in the trade wars could give pause to the Fed’s current rate-hiking policies moving forward as they could potentially stymie economic growth.
Powell didn’t sidestep the issue, commenting that the Federal Reserve is fully aware of the ongoing fret amongst not only the capital markets, but from actual businesses themselves.
“You will have seen that we have this very extensive network of business contacts around the country through reserve banks largely and we’ve been hearing a rising chorus of concerns from businesses all over the country,” Powell said.
However, despite the growing concerns of trade wars, Powell said its wide-ranging effects have yet to penetrate the economy and cause any disruptions. Bostic appears to share this same sentiment.
“After digging through the data, consulting our economic models, and gathering a Main Street perspective from our extensive network of business contacts, I come away with the sense that economic growth is on a strong trajectory,” said Bostic. “It’s on solid footing and hasn’t been materially pushed higher or lower.”
Last month, Powell mentioned that loss of business confidence could reduce investor capital and the long-term effect on the financial markets are reasons that could bring trade wars under heavier scrutiny by the Federal Reserve. However, without hard data to substantiate these concerns as a result of the trade wars, Powell could not definitely say that tariffs are to be dealt with head on just yet.
The capital markets will get an idea of just how strong the economy is when the third-quarter GDP reading is released on Friday. Market prognosticators are expecting the number to hover around 3.3 percent.
The Atlanta Federal Reserve’s tracker estimates GDP to come in around 3.9%, but even Bostic acknowledges that the economy is by no means impervious to pain from external factors disrupting growth, but is still strong enough to support itself.
“That does not mean that the trajectory for the economy is immovable,” Bostic said. “There are ample reasons for a central banker like me to be concerned. But, from my perspective, the economy is performing well enough to stand on its own without support from accommodative monetary policy.”
For more trends in fixed income, visit the Rising Rates Channel.