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How many hikes?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • The US Federal Reserve is almost certain to raise rates 0.25% in September. Anything other than a rate rise would be a shock to the financial markets. The Federal Reserve does not like to shock the markets.
  • What happens next is less clear. The Fed has set a "hike, pause, hike, pause" pattern. That is nice and easy to predict. That would suggest a rate hike in December. The US economy remains strong. Inflation rates certainly justify a rate rise. The labor market is also strong. The housing market has been weaker, but this is because prices are rather high. That should not stop the Fed from raising rates.
  • But a December rate rise is not certain. US President Trump's trade policy is hard to predict. The trade policy involves raising taxes for US consumers. Other countries are hurting US exports. These are things that could slow the US economy quite quickly. High trade taxes could also hurt the equity market, doing more economic damage. It does take time for tariffs to hit the US consumer. Higher trade taxes now would not be felt until after the November mid-term elections. But if tariffs are big, the Fed may pause in December.