The U.S. economy continues to move forward at a significant speed with tailwinds from a strong stock market that has already seen major indexes like the S&P 500 reach record levels with companies like Apple and Amazon reaching the $1 trillion market capitalization level.
As such, the Federal Reserve is primed to continue hiking the federal funds rate, according to the latest CNBC Fed Survey, which showed that a rate hike in September is all but certain at 98% and the chances of another hike in December is just as strong at 96%.
The Fed’s monetary policy meeting is slated for later this week, and the common notion among the capital markets forecasts that more rate hikes are to come. The CNBC survey included 46 respondents comprised of economists, fund managers and strategists.
“Fed funds increases in September and December are as certain as certain can be,” John Donaldson, director of fixed income at Haverford Trust, wrote in his response to the survey. “Their real challenge starts after the first increase in 2019, which will bring the rate to 2.75 percent, or finally back to even to inflation.”
Source: tradingeconomics.com
As far as specifics go, survey respondents see the Federal Reserve raising the federal funds rate another 25 basis points this week and an additional 25 in December, which would leave rates at 2.5.
Furthermore, survey respondents forecast an increase of 50 more basis points in 2019, bringing the federal funds rate to a range of 2.75 to 3%. The data then begins to show divergences in thought with half of the respondents eyeing a third hike in 2019–60% see the Fed raising rates above neutral to slow down the pace of the economy.
All in all, the average of respondents see the federal funds rate at 3.3% once the Federal Reserve is done hiking rates.
“This means that the U.S. bond market will reach a decision point sometime in the next year, when market participants will have to decide whether the Fed will go beyond current market pricing,” said Tony Crescenzi, executive vice president at Pimco. “If and when it does, U.S. Treasuries will move higher.”
For more trends in fixed income, visit the Rising Rates Channel.