US economy

Too early to discount prospect of Fed rate increases


How quickly the consensus can change.

Less than a month ago, fears of slowing US growth were compounded by hawkish comments from Federal Reserve officials that appeared to pave the way for further interest rate increases.

The prospect of tightening financial conditions, even if the economy begins to falter, contributed to volatile price movements across corporate bonds and equities.

But so far this year it seems investors have taken comfort from some slightly more cautious commentary from Fed policymakers.

The latest came on Wednesday, when St Louis Fed president James Bullard, a new voting member on the board this year, said the central bank was “bordering on going too far and possibly tipping the economy into recession” if it pushed rates up further, according to the Wall Street Journal.

The prospect of further rate increases has all but been priced out of the market. The probability of no change to the Fed’s target policy rate this year stands at 75 per cent, according to CME Group data based on fed funds futures. Just a month ago, that figure was less than 50 per cent.

In December the Fed projected two quarter-point increases for 2019, down from a forecast of three. Mr Bullard said in the WSJ interview that even the revised forecast was still “too hawkish in this environment”.

The consensus among analysts has shifted too.

“Signs of a pullback in global economic growth, particularly centred on a slowdown in China, have altered the balance of risks in the eyes of Fed policymakers,” HSBC chief US economist Kevin Logan said this week.

Mr Logan cut his estimate for 2019 rate increases from two 25 basis point rises to none, joining other Wall Street economists who have pared back expectations.

But many investors and analysts also acknowledge that the US economy is yet to clearly show that the rate of growth is fading. Last week’s jobs numbers were the latest in a series of bullish indicators.

Last month investors became concerned that the Fed could increase interest rates too rapidly. The risk now is that investors have been too quick to write off the chances of rates rising this year.



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