FED MIGHT SLOW INTEREST HIKES
Federal Reserve Chairman Jerome Powell and his colleagues are likely to turn more waryaboutmarching interest rates higher after delivering a widely anticipated quarter percentage-pointincrease in December.Prospects for slowing global economic growth, fading U.S. fiscal stimulus and volatilefinancialmarkets all argue for more caution once officials lift rates next month near or into neutralterritory, where policy neither spurs nor reins in economic activity.Investors have already reduced bets on how many times the central bank will hike nextyear,partly reflecting a more dovish tone from policy makers in the past week, though a move atnextmonth’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 ofnextyear,’’ said Gene Tannuzzo, fund manager and deputy global head of fixed income atColumbiaThreadneedle Investments. “Markets need to adjust to lower and slower, both in terms ofgrowthand interest-rate increases.”That would probably be welcome news for a stock market that is struggling to find a floor
afterselling offfrom record highs. The S&P 500 Index has fallen about 10 percent from aSeptemberpeak on a variety concerns, from worries about the U.S.-China trade war to doubts aboutloftyvaluations of technology shares. Corporate bond spreads have widened as well asinvestors havebecome more risk averse.Federal Open Market Committee members in September provisionally penciled in threerateincreases for 2019, according to their median forecast released at that time. They are due toupdate that forecast at their Dec. 18-19 meeting.With stocks down and growth in Germany and Japan contracting last quarter, “I wouldn’t besurprised if the Fed backs away from the three hikes it has built into 2019,’’ said DonaldEllenberger, a senior portfolio manager at Federated Investors Inc.Gautam Khanna, a senior fund manager at Insight Investment, agreed that the recent pick-up infinancial markets’ volatility will probably prompt the Fed to reassess its 2019 rate hike plans.Atthe start of this month Khanna had expected the Fed to deliver the three hikes it signaled inSeptember.Collectively, traders in money-market derivative contracts are betting on just over one 2019ratehike — pricing in only about 0.33 percentage point of tightening. That’s down from the morethan0.50 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 JanHatziusand Bank of America Merrill Lynch’s Ethan Harris. Peter Hooper, a 26-year veteran of theFedwho is chief economist for Deutsche Bank Securities, is also currently predicting fourincreases,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 EconomicClub ofNew York on Nov. 28. Speaking in Dallas last week, he laid out a scenario for a pause in thecentral bank’s interest-rate hiking campaign sometime next year by highlighting potentialheadwinds to the U.S. economy.