Arthur J. Villasanta – Fourth Estate Contributor
Washington, DC, United States (4E) – The U.S. Federal Reserve will likely slow down the pace of its interest hike spree in 2019 with some even hazarding to predict the pause might be longer than expected.
The last rate hike for the year is expected next week. But unmistakable signs of extremely volatile equity markets over the past two months and an overseas slowdown in growth have raised doubts the Fed will go ahead with all its planned rate hikes for 2019.
As a consequence of these headwinds, Goldman Sachs believes the Fed is now more likely to pause its rate hikes in March. The Fed will, however, go ahead with three more hikes later in 2019. Goldman previously predicted four rate hikes in 2019, far more than that implied by financial markets.
“We think the probability of a move in March has now fallen to slightly below 50 percent,” said Goldman in a note to investors. But “we see a return to quarterly hikes in June that last through the end of 2019.
Over the weekend, Federal Reserve governor Lael Brainard said the economic vista facing the U.S. is broadly positive. She said tailwinds buffeting growth are fading due to the palpable global growth slowdown; tighter financial conditions and the waning boost from fiscal stimulus.
Risks, however, are growing overseas and in domestic corporate debt markets. She said the gradual path of increases in the federal funds rate has served the U.S. well by giving the Fed time to assess the effects of policy as it moves forward.
She pointed out this approach remains appropriate in the near-term, although the policy path increasingly will depend on how the economic outlook evolves.
Bainard’s declarations were, however, contradicted by St. Louis Federal Reserve bank president James Bullard. A policy dove, Bullard repeated his call for the Fed to pause its current cycle of interest rate increases.
He argued the Fed might already be crimping America’s economic growth. He pointed out that inflation forecasts are moving downward. Bullard claims investors are nervous the Fed has gone too far in withdrawing monetary easing.
The biggest threat posed by a Fed rate hike to the broader economy is the real risk the Treasury market yield curve might invert this month, resulting in the feared Death Cross that’s been the harbinger of an economic recession in the past.
The Death Cross derives its name from the X-shape created when the short-term moving average falls below the long-term moving average. Historically, the Death Cross precedes a prolonged downturn for both the long-term and short-term moving averages.
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