Bill Evans, Research Analyst at Westpac, suggests that they have increased their likely peak in the Federal Funds rate to 2.625% in response to Congress’ recently announced spending package.
“With RBA still expected to remain on hold in 2018 and 2019 we now see FED funds 112 bp’s above RBA cash rate in 2019.”
“Since we released our February Market Outlook there has been a significant change in US fiscal policy. Congress has supported a $300 billion (1.5% of GDP) spending package over the 18 months from April 2018. That follows the recently approved Tax Package estimated at a current cost of $1.5 trillion over 10 years.”
“One of the key themes from my discussions with real money managers; economists; and some officials over the last two weeks I was in the US focussed on the risks to stability of an ill- timed major fiscal stimulus. Most discussion was initially around the Tax Package although concerns around a prospective new spending package gathered momentum, particularly in the final week of the visit.”
“With momentum in the US economy lifting and the unemployment rate, at 4.1%, already comfortably below the estimated full employment rate of 4.5%, concerns were widely raised about stimulatory fiscal policy overheating the economy. Arguably we have not seen a comparable policy "mix" since the 1960’s.”
“With the introduction of the new spending package we have raised our forecasts for GDP growth in the US from 2.5% in 2018 and 2.2% in 2019 (see February Market Outlook) to 3.0% and 2.5% respectively.”
“With potential growth in the US generally assessed as around 1.7% these revised growth rates will pressure the output gap. The unemployment rate is likely to fall below 3.8% by year’s end meaning that the unemployment rate will have held below the full employment rate for nearly 2 years.”
“Despite likely ongoing volatility in equity markets and a rising bond rate (we have increased our forecast for the US 10 year bond rate by year’s end to 3.35% from 3.25%) the associated tightening in financial conditions is unlikely to slow momentum sufficiently to allow the FED to go on hold by year’s end.”
“In our February Markets Outlook we envisaged three FED fund hikes in 2018 with rates going on hold in 2019.”
“We now expect two further (March and June) FED hikes in 2019. The Federal Funds rate will then have reached 2.625%. FED estimates point to 2.5% (0.5% real) as the neutral rate.”
“With financial conditions tightening (we expect the 10 year Treasury rate to peak around 3.5% by March 2019); and the cessation of the temporary spending package; we assess that a modest move into "contractionary territory" will be sufficient to allow the FED to go on hold from mid-year.”
“Growth in the US economy is likely to slow in the second half of 2019 with bond rates easing somewhat. However, we do not envisage an inverse yield curve by end 2019 and therefore no signal of an imminent US recession (inverse yield curves usually precede recessions in the US).”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.