Tuesday, January 01, 2019

Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?

Earlier I posted some questions for this year: Ten Economic Questions for 2019. I'm adding some thoughts, and maybe some predictions for each question.

6) Monetary Policy:  The Fed raised rates four times in 2018.  Currently the Fed is forecasting two more rate hikes in 2019.   Some analysts are forecasting three rate hikes.   Will the Fed raise rates in 2019, and if so, by how much?

The Fed raised rates once in 2015, once again in 2016, three times in 2017, and four times in 2018.   Currently the target range for the federal funds rate is 2-1/4 to 2‑1/2 percent.

There is a wide range of views on the FOMC.  As of December, looking at the "dot plot", the FOMC participants see the following number of rate hikes in 2019:

25bp Rate Hikes
in 2019
FOMC
Members
One Rate Cut0
No Hikes2
One4
Two5
Three6
Four0

The main view of the FOMC is about two rate hikes in 2018.

Goldman Sachs economists wrote last week:
“We have made a further downgrade to our funds rate call. We now see a probability-weighted 1.2 hikes in all of 2019, from 1.6 hikes previously."
The economy slowed in the 2nd half of 2018, and it seems likely the FOMC will "pause" in Q1 (and maybe for the first half of 2019).  However, as the economy approaches full employment, the FOMC will be watching for any pickup in inflation, and that could lead to more rate hikes.

I think one or two rate hikes in 2019 seem likely, and my current guess is just one hike in the 2nd half of the year.

As an aside, many new Fed Chairs have faced a crisis early in their term.   A few examples, Paul Volcker took office in August 1979, and inflation hit almost 12% (up from 7.9% the year before), and the economy went into recession as Volcker raised rates.   Alan Greenspan took office in August 1987, and the stock market crashed almost 34% within a couple months of Greenspan taking office (including over 20% in one day!).  And Ben Bernanke took office in February 2006, just as house prices peaked - and he was challenged by the housing bust, great recession and financial crisis.

Hopefully Jerome Powell will see smoother sailing.

Here are the Ten Economic Questions for 2019 and a few predictions:

Question #1 for 2019: Will Mr. Trump negatively impact the economy in 2019?
Question #2 for 2019: How much will the economy grow in 2019?
Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
Question #3 for 2019: Will job creation in 2019 be as strong as in 2018?
Question #4 for 2019: What will the unemployment rate be in December 2019?
Question #5 for 2019: Will the core inflation rate rise in 2019? Will too much inflation be a concern in 2019?
Question #6 for 2019: Will the Fed raise rates in 2019, and if so, by how much?
Question #7 for 2019: How much will wages increase in 2019?
Question #8 for 2019: How much will Residential Investment increase?
Question #9 for 2019: What will happen with house prices in 2019?
Question #10 for 2019: Will housing inventory increase or decrease in 2019?

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