Like a newly-licensed driver operating a clunky manual transmission, the Federal Reserve has been feverishly looking for neutral and it appears that after shifting higher with rate-hikes through 2018, neutral policy might not be too far away, according to Atlanta Fed President Raphael Bostic.
“I don’t think we are too far from a neutral policy, and neutral is where we want to be,” Bostic told the Global Interdependence Center in Madrid, Spain. “I am inclined to think that a tentative approach as we proceed and get closer and closer to neutral would be appropriate.”
The Fed installed its third rate hike in September and is widely expected to raise rates for a final time to cap off 2018–its fourth for the year and possibly the eighth since 2016. With unemployment at generationally low levels, economic growth and an inflation target close to meeting its 2% level, the CME Group’s FedWatch Tool is showing a 72.3% chance of raising rates in December another 25 basis points to bring the federal funds rate to 2.50.
As far as where neutral range rests, Bostic sees it at between 2.5% to 3%.
Rate Hike in December Not 100% Certain
While the general consensus is one more rate hike is imminent, saying the chances are 100 percent would be too soon, according to San Francisco Federal Reserve Bank president Mary Daly.
“I think it’s premature to say that it’s definitely needed,” said Daly.
Daly foresees more rate hikes to come, but as far as when they will occur, that is something she can’t determine just yet.
“My modal forecast is for two to three (rate hikes) over the next period of time, with the exact timing not being certain,” said Daly.
The latest Fedspeak is the movement of rates toward a level of neutrality, but that could mean different things to different people–Daly has her own assessment.
“If you asked me today I’d probably pick” the middle of the range, about 2.7 percent,” Daly said.
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Can Trade Wars Derail Rate Hikes?
Interest rates have been a hot button topic, particularly as U.S. President Donald Trump is content with stoking the fires with his public discontent for rising interest rates. After September’s announcement, 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. However, despite the growing concerns of trade wars, Powell said its wide-ranging effects have yet to penetrate the economy and cause any disruptions.
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 Fed. 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.
“Until we see it in the numbers, it’s hard to say how one would react,” said Powell.
For more trends in fixed income, visit the Rising Rates Channel.