The fear of aggressive Federal Reserve rate hikes is fading.
Granted, with a red-hot labor market and an economy running well above expectations, the Federal Reserve is likely to raise rates at its December 18 and 19 meeting.
In fact, analysts expect a 25-basis point increase in rates
After all, 2018 has been a great year for the U.S. economy, especially with unemployment at multi-decade lows and broad-based momentum caused by the tax cuts.
However, after several months of market volatility, and signs of a slowdown in overseas markets, the central bank may slow, or even stop rate hikes for next year -- a significant change from expectations for another three rate hikes in 2019.
Federal Reserve Chair, Jerome Powell, recently switched from saying monetary policy was a “long way” from neutral to suggesting rates are “just below” estimates of neutral policy– a statement welcomed by investors worried about aggressive interest rate hikes.
Not everyone agrees that we’ll see fewer hikes, though.
According to Goldman Sachs, the central bank is likely to pause its rate hikes in March 2019, before continuing with another three hikes between June and December 2019.
Part of the reason for potentially higher interest rates, Goldman Sachs believes is wage growth, which is now above 3% year over year. There could be even more upside given labor market tightness.
Others aren’t so sure Goldman is right.
In fact, many investors are betting the central bank will halt rate hikes altogether in 2019, and even move to cut borrowing costs again. After all, there are considerable concerns about U.S. growth amid the current global slowdown, especially with trade war concerns.
"To us the trade war and the Fed are the two biggest headwinds for the market," said Julian Emanuel, head U.S. equity and derivatives strategist at BTIG, as quoted by CNBC. "I think part of the reason we're not lower right now is that the market is starting to discount the probability of the Fed not moving next week."
We must also consider the lagging effects of a stronger dollar on the economy, too. Home sales are beginning to slow, as 30-year mortgage rates increase. There’s also sizable contraction in global economies, such as in Germany, Japan and Italy.
For a clearer view of exactly what the central bank has up its sleeve, we need to wait for the December 2018 meeting.
Whatever may happen, The Cheap Investor will keep you one step ahead of the market.