Is The Fed Done Tightening After December?

It’s beginning to look a lot like the Federal Reserve is done tightening, at least after next week’s monetary policy meeting, when it’s expected to raise interest rates another 25 basis points, to 2.5%, its fourth rate hike this year. After that, however, it’s looking less and less likely that it will raise rates at all next year, certainly not four times, which seemed to be the market consensus not all that long ago.

As we know well, Fed chair Jerome Powell told the Economic Club of New York late last month that interest rates are “just below” the so-called neutral rate, a retreat from his comments less than two months earlier that the fed funds rate was a “long way” from neutral. That sparked a big, but short-lived, rally in both bonds and stocks, as it left investors with the idea that Powell and the Fed are going to be a lot less hawkish moving forward in light of still somnolent inflation and now signs of a weakening economy, exacerbated by the recent inversion of some Treasury bond yield curves, which traditionally have been a sign of impending recession.

As CNBC’s Jim “Mad Money” Cramer noted on Monday, the Fed "risks its credibility" if it doesn’t raise rates next week, a move it has been telegraphing for several months. Failure to do so risks setting off a market panic because, as Cramer said, the Fed could create the impression that “there's something really wrong that we don't know about.” So the Fed has largely backed itself into a corner and must go through with it, whether it wants to now or not.

But what about next year? More and more the signs are pointing to no rate increases for a while after December.

On Monday, Goldman Sachs retreated from its earlier forecast of four rate hikes in 2019. It now expects the Fed to do nothing at its March meeting, the next time the Fed would be likely to raise rates (the Fed had said earlier that it only plans to take rate actions at meetings that are followed by a Powell press conference and the release of updated economic forecasts). Goldman does, however, expect the Fed to resume rate hikes in June, September, and December.

But also on Monday, hedge fund manager John Tudor Jones went even further, telling CNBC that he expects no rate hikes after this month’s meeting, which he said confidently will be “the last one for a long time. I don’t think they’re going to hike in 2019.”

Before and after Powell’s comments, other members of the Fed were making similar pronouncements, indicating that the entire Fed, or certainly a high percentage of them, are engaged in a serious rethinking of their monetary tightening strategy.

And let’s not forget President Trump, who was the first person to criticize the Fed for raising rates loudly. He, of course, has ulterior motives, such as worries that higher rates will endanger the economic recovery he credits himself with creating, not to mention how many billions of dollars in debt service will be added to the federal budget.

Last Thursday the New York Times, of all places, ran an article entitled, “Why Trump Might Be Right About Interest Rates.”

“What if President Trump’s gut turns out to have been right and the Federal Reserve’s interest rate increases are holding back the United States economy?” the article says. “If that’s the case, Mr. Trump, in his own way, may prove prescient.”

But assuming that the Fed takes to heart what now seems to be the consensus view that it’s been too hawkish in raising rates and now takes its collective foot off the brake, does that mean it’s doing the right thing? Would it now be panicking in the other direction, believing that raising rates past 2.25% is more than the economy – and the financial markets – can handle?

The Federal Reserve banks of Atlanta and New York now expect U.S. GDP to slow to an annualized rate of 2.5% in the current quarter, down from the third quarter’s 3.5% pace. That’s a pretty big drop-off in just one quarter, and arguably a reason for concern – and for the Fed to maybe take a short wait-and-see pause before considering the next rate move.

Fortunately, the Fed’s monetary policy meeting calendar already has a pause built in, given that it likely would not have made any rate moves until next March anyway (the Fed’s first meeting of 2019 isn’t until the end of January, followed by the March meeting). A lot can happen between now and then – both good and bad. Powell and the Fed should be thankful that they don’t have to make any dramatic decisions soon that may come back to bite us.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.