23 Nov Fed might slow interest hikes
Federal Reserve Chairman Jerome Powell and his colleagues are likely to turn more wary about
marching interest rates higher after delivering a widely anticipated quarter percentage-point
increase in December.
Prospects for slowing global economic growth, fading U.S. fiscal stimulus and volatile financial
markets all argue for more caution once officials lift rates next month near or into neutral
territory, where policy neither spurs nor reins in economic activity.
Investors have already reduced bets on how many times the central bank will hike next year,
partly reflecting a more dovish tone from policy makers in the past week, though a move at next
month’s meeting is still firmly priced with odds above 70 percent.
“December is probably too early for pause, but we could certainly see it in the first half of next
year,’’ said Gene Tannuzzo, fund manager and deputy global head of fixed income at Columbia
Threadneedle Investments. “Markets need to adjust to lower and slower, both in terms of growth
and interest-rate increases.”
That would probably be welcome news for a stock market that is struggling to find a floor after
selling off from record highs. The S&P 500 Index has fallen about 10 percent from a September
peak on a variety concerns, from worries about the U.S.-China trade war to doubts about lofty
valuations of technology shares. Corporate bond spreads have widened as well as investors have
become more risk averse.
Federal Open Market Committee members in September provisionally penciled in three rate
increases for 2019, according to their median forecast released at that time. They are due to
update that forecast at their Dec. 18-19 meeting.
With stocks down and growth in Germany and Japan contracting last quarter, “I wouldn’t be
surprised if the Fed backs away from the three hikes it has built into 2019,’’ said Donald
Ellenberger, a senior portfolio manager at Federated Investors Inc.
Gautam Khanna, a senior fund manager at Insight Investment, agreed that the recent pick-up in
financial markets’ volatility will probably prompt the Fed to reassess its 2019 rate hike plans. At
the start of this month Khanna had expected the Fed to deliver the three hikes it signaled in
Collectively, traders in money-market derivative contracts are betting on just over one 2019 rate
hike — pricing in only about 0.33 percentage point of tightening. That’s down from the more than
0.50 percentage point they expected earlier this month.
Some long-time Fed watchers, though, are sticking with their forecasts of four hikes in 2019,
arguing that a solid domestic economy and ultra-low unemployment call for higher rates.
They include JPMorgan Chase & Co.’s Michael Feroli, Goldman Sachs Group Inc.’s Jan Hatzius
and Bank of America Merrill Lynch’s Ethan Harris. Peter Hooper, a 26-year veteran of the Fed
who is chief economist for Deutsche Bank Securities, is also currently predicting four increases,
although he allowed that call could change given recent softness in inflation.
Powell will get chance to spell out the Fed’s thinking when he addresses the Economic Club of
New York on Nov. 28. Speaking in Dallas last week, he laid out a scenario for a pause in the
central bank’s interest-rate hiking campaign sometime next year by highlighting potential
headwinds to the U.S. economy.