In the US, Fed policy has had the funds rate inching towards zero in real terms, in line with the growing bias of firms to add capital rather than labour to boost output. Inflation, however, is starting to pick up and the FOMC decision-making process now has to consider a markedly easier fiscal policy that is mostly targeting capital-intensive industries, through tax reforms and increased defence spending. Fed Chair Powell is, in our view, more sensitive to market mischief than to price indexes. As such, he may very well be compelled to act more aggressively than the market expects if he thinks greed is getting out of hand. We believe the base case is four 25bp rate hikes in 2018 with the impact of fiscal policy still on the policy horizon.
At time of writing, 26 October 2018, the Fed has hiked three times in 2018. Markets have repriced their expectations through the year and a fourth hike at the December meeting is fully priced in.