After the central bank did as expected and stood pat with interest rate hikes in November, the general consensus is that a final rate hike to cap off 2018 is expected, but to say 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.
The CME Group’s FedWatch Tool is forecasting a 75.8% chance of a December rate hike as of Tuesday, but afterwards, the algorithm is split. 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.
September’s rate hike saw the central bank raise the federal funds rate 25 basis points to 2.25. 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 Ease 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 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.
“Until we see it in the numbers, it’s hard to say how one would react,” said Powell.
More talk of trade wars came back to rack the markets on Monday, but the tangible impact of tariffs is less than one might think as third-quarter earnings season comes to a close. According to data from FactSet, only 9% of companies that have reported earnings thus far said tariffs are having a negative impact.
Delving deeper into the data of S&P 500 companies that have reported earnings, the mention of the word “tariffs” came up during earnings reports less times than the previous quarter–138 as opposed to 157. The decline in the number of instances where tariffs were mentioned could signal that the impact of trade wars could be waning.
“The small decline in the number and percentage of companies discussing tariffs in the third quarter relative to the second quarter may be a sign that there is slightly less concern in corporate America about widespread impacts from the tariffs throughout the economy,” wrote John Butters, senior earnings analyst at FactSet.
For more trends in fixed income, visit the Rising Rates Channel.