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Fast Comment USFed hikes rates, signals two more rate hikes in the second half of this year

  1. Fed hikes rates as expected
  2. Two more rate hikes in the second half of this year signalled
  3. Policy rates higher than the long-run neutral rate in 2019
Fed hikes rates as expected
The Fed hiked the target range for the fed funds rate by 25 basis points to 1,75-2,00 %, as widely expected and in line with market pricing. It was the second hike this year and the seventh in this cycle.
Two more rate hikes in the second half of this year
The median forecast for the policy rate was raised for 2018, signaling two more rate hikes this year, i.e. four rate hikes in total. However, it was a close call between three and four rate hikes. The Fed was only one member (dot) away from continuing to forecast three rate hikes in 2018. FOMC members increased their growth forecast for 2018 slightly to 2.8 % from 2.7% in March, while the unemployment rate forecast is lowered to 3.6 % from 3.8% previously. The forecast for core inflation was increased to 2.0% from 1.9% previously. The USD strengthened somewhat on the outcome and bond yields were slightly higher. Currently, the market is pricing in slightly more than three rate hikes in 2018. We think that a tight labour market and rising core inflation will push the Fed toward four rate hikes this year
Policy rates higher than the long-run neutral rate 2019
The median forecast continues to indicate three rate hikes in 2019, but just one hike in 2020 from two hikes previously. This means that the policy rate will be slightly higher than the long-run neutral interest rate in 2019 (3.1 % vs. 2.9%). There were no major changes to the macro forecast for 2019 and 2020. The Fed’s forecast for the policy rate in 2020 is significantly above market pricing and our forecast. We expect a tight labour market and the fading of the boost from fiscal stimulus, together with the tightening of monetary conditions, to prompt a slowdown in economic growth in 2019 and 2020. That will prompt the Fed to reverse course and begin cutting rates in 2020, we believe, in sharp contrast to the Fed’s forecast.

Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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