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Robert Abad, product specialist, Western Asset Management.
The Fed created a lot of confusion in their communications with the market. For example, if you go back to October of last year, the chairman of the Fed, Jay Powell, made some statements about US economic growth that really caused Treasury yields to spike. In retrospect, this was totally unwarranted and created a lot of unnecessary fixed income and equity market volatility which obviously hurt investors’ portfolios.
But, the good news is that the Fed has finally come around and acknowledged that the underlying data around housing, autos, and manufacturing in the US warrant what they describe as a need for patience. They’ve also recognized the importance of keeping global developments, such as Brexit and the US China trade discussion, in mind. Now, this makes a lot of sense to us because the world is very interdependent. If China slows down faster than expected, or we have a bad outcome with Brexit, or we experience another tail risk, in other words a risk that we can’t foresee which turns global markets upside down, all of this would clearly blow back to the US in terms of weaker business and consumer confidence.
It’s good to see the Fed pivoting away from a predetermined course that was biased towards aggressively raising rates, and finally recognizing the need for prudence. All this adds up to our call, that the Fed should continue to reaffirm its stance this coming March. Now, for the year as a whole, we expect the Fed to hike one more time, at most. It’s just that we don’t see signs of faster growth and inflation in the US as some other market participants see. If anything, the Fed may still hike one more time, but we think that’s more about building up insurance in case they need to cut rates, down the road. The fact is, the current string of economic data paints the picture of a US economy that’s moving sideways at best, balking around two, two and a quarter percent growth speed. In our view, that’s not strong enough for the Fed to continue hiking. It also doesn’t mean that we’ll see the Fed cutting rates anytime soon. If anything, we think all the noise around US recession risk is a bit overdone.
At this point in the rate-hiking cycle, no more hikes or even one more hike wouldn’t be enough to rattle markets. I think we would need to see real signs of an economic pickup or sustain inflation, and we’re not just talking about CPI, but PCE, which is the personal consumption expenditure indicator, which is what the Fed really focuses on. In such a scenario their markets obviously would react negatively to the idea of even more rate hikes. But interestingly enough, faster economic growth isn’t necessarily a bad thing for global growth or corporations worldwide. On one hand, the idea of faster growth would be a positive from a fundamental standpoint, but it’s really the idea of more rate hikes going forward that would be a risk-off event for markets.