If you take the Fed’s “dot plots” at their word, three or four more hikes in 2019, after raising rates in December would seem to be the order of the day, says Steve Blitz, Chief US Economist. There is, of course, an inherent disconnect between the Fed continuing to put out these forecasts and the evolving economic outlook. Our sense is that the economy is beginning to slow, at least slowing down towards the Fed’s noninflationary trend real growth target of around 2%. With growth at trend and employment full, and the underlying tow of disinflationary forces remaining dominant (globalization, demographics, and technology – this is the Fed’s view), it is easy to envision the FOMC looking at this landscape and declaring the funds rate “neutral”. Higher real yields, the strong dollar, trade disruptions, slowing growth in the emerging markets, are all pushing US economic growth down to the 2% mark. Therefore, after December, we believe the Fed goes one more time and then again in March and then stop. If the equity market is soft enough come December, the Fed will still go but their rhetoric, carefully chosen, will flatten their outward projections for the trajectory of rates. The subsequent bull flattening of the yield curve should be supportive of the equity markets and the economy more broadly. And this brings me back to my opening point about the “dot plots”. The Fed is going to have to rethink their communication policy as we move to world where they want the upward trajectory to flatten without signalling concern about recession. The Chicago Fed will have a conference in June about just that.
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