10 End-of-year Updates on the US Federal Reserve
Below Dan North, Chief Economist at Euler Hermes North America, lists several updates and thoughts on the latest matter surrounding the US federal reserve.
- A rate increase is a lock this week.
- We have been saying there will be 2-3 hikes in 2018, but now there seems to be pressure towards 3-4.
- We expect that the dreaded “dot-plot” the worst communications device ever, will also show a bit more of a lean to 4 hikes next year as recent economic data has been solid, and prospects for tax reform appear good (but we’re not there yet).
- The solid data will likely lead to a slight increase in the Fed’s GDP forecasts.
- Many wonder why the Fed is raising rates when we are still in relatively slow growth with no inflation. But it’s not about inflation today, it’s about inflation tomorrow since monetary policy acts with a lag of 3-5 quarters. And there is inflation – it’s just that it’s in assets like stocks, not consumer prices. Fed officials have expressed concerned about the risk of asset prices being overvalued.
- There is a problem though, Houston. The yield curve is flattening, and it may be because of the Fed. Clearly markets expect the Fed to keep driving the overnight rate up, and that could be pushing up the short end of the curve. And if you believe Fed actions will hold down inflation that could be pushing down the long end. That’s not a good sign for growth.
- Let’s not forget, when the Fed raises rates, it’s trying to slow the economy, and it works.
- Expectations are that there will be little change in posture next year under Powell’s command since he has never dissented as a Board member since 2012. He gave a relatively dovish testimony at his Senate hearing, suggesting he would basically be following in Yellen’s footsteps of raising rates gradually. But he also cautioned, as has Yellen, that hiking too slowly could cause inflation to overheat and force the Fed to hike rates faster.
- Interestingly Powell indicated that banking regulations implemented after the financial crisis were strong enough, but that it was also time to make the rules more efficient and less burdensome. “"We want regulations to be the most intense, the most stringent for the very largest, most complex institutions and want it to decrease in intensity and stringency as we move down through the regional banks and the community banks,"” Regional banks have been caught up in regulations designed for the larger banks, hampering loan growth. Relief for them could help the economy, and their stocks have rallied sharply since his testimony.
- Of course it’s Yellen’s last press conference. Will we hear a farewell, or some fond reminiscences?