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AmInvest Research Reports

Author: AmInvest   |   Latest post: Fri, 18 Jan 2019, 09:32 AM

 

US – Fed decision will be strongly data dependent

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The Federal Reserve has acknowledged that the policy path ahead is "less clear" after raising interest rate in December 2018 to bring the policy rate to 2.25%–2.50%, the fourth increase in the year and the ninth since policy normalization began in December 2015. The minutes of the meeting suggests that with an increase in the target range, the federal funds rate would be at or close to the lower end of the long-run neutral interest rate as 2018 issues are still high in the cards.

It is a clear demarcation from what the Fed cited a few months earlier in 2018, suggesting four rate hikes as opposed to our view of one or two rate hikes in 2019 as we expect the Fed’s decision for any policy changes will be strongly based on the potential incoming data that will provide a clear picture on the risk as to whether it is leaning more on an upside or downside to allow it to institute any policy changes.

  • The Federal Reserve has acknowledged that the policy path ahead is "less clear" after raising interest rate in December 2018 to bring the policy rate to 2.25%–2.50%, the fourth increase in the year and the ninth since policy normalization began in December 2015. The December rate hike was instituted with some reluctance from a few members who felt there was a lack of inflationary pressures to justify another increase.
  • The minutes of the meeting suggests that with an increase in the target range, the federal funds rate would be at or close to the lower end of the long-run neutral interest rate. Issues like trade tensions, waning of fiscal stimulus, global growth prospects, sustainability of corporate earnings growth, further tightening of financial conditions, risk of a stronger negative impact from monetary tightening, political noises and moderate rise in commodity prices remain high in the cards. Moreover, volatility remains a focus in financial markets.
  • Thus, Fed officials have agreed for "gradual increases" in the benchmark funds rate to be appropriate. It is a clear demarcation from what the Fed cited a few months earlier in 2018 suggesting four rate hikes as opposed to our view of one or two rate hikes in 2019 as we expect the Fed’s decision for any policy changes will be strongly based on the potential incoming data. We believe the potential incoming data will provide a clear picture on the risk as to whether it is leaning more on an upside or downside to allow it to institute any policy changes.
  • Supporting our view is the December statement where the Fed replaced the phrase "the Committee expects that further gradual increases" to "judges that some further gradual increases” are coming, implying it is suggesting the potential decision will be data dependent and "relatively limited amount" of hikes would be coming.

Source: AmInvest Research - 10 Jan 2019

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