Adding to widespread concern that the global economy could deteriorate next year, the view has begun to grow that the fed might pause raising interest rates, given recent dovish comments by chairman colin Powell.However, combined with the fed’s decision-making mechanism and the fundamentals of the us economy, it is almost certain that the fed will raise interest rates in December, and it is expected to raise rates twice in 2019.In other words, the pace of rate rises is likely to slow next year, but not stop.
Judging from the policy-making mechanism, the pace of interest rate hikes has been normalized by the federal reserve.The fed withdrew from quantitative easing in 2014 and raised interest rates for the first time in seven years in December 2015. In the following two and a half years, the fed raised interest rates seven more times to 2.25%, including three increases in March, June and September 2018.According to the latest chart of the fed’s interest rate hike, the expected target of the federal funds rate in 2018, 2019 and 2020 is 2.375%, 3.125% and 3.375%, respectively, which means that the pace of the future is 1 interest rate hike in December, 3 interest rate hikes in 2019 and 1 interest rate hike in 2020, and the fed’s meeting in November once again declares that it will raise interest rates gradually.At the moment, the implied December rate rise is 72.8 per cent.
Fundamentally, the us economy, employment and inflation will continue to provide strong support for the fed to raise interest rates.First, revised second-quarter real GDP was 4.2%, the highest in 15 quarters.At an annualized rate of 3.5% in the third quarter, GDP was down from the second quarter, but still the second highest in 15 quarters.It is easy to see why the fed has raised its forecasts for the us economy for the seventh straight quarter since the first quarter of 2017.Second, employment in the United States was stronger than expected in October, the unemployment rate hit a new low, hourly wage growth hit a new high, and the steady employment level is also the “biggest confidence” for the federal reserve to raise interest rates.Third, the us consumer price index rose to 2.5 per cent year-on-year in October, the seventh straight month it has been above 2.5 per cent.Inflation is widely expected to remain high.
It is important to note that the fed’s November meeting, while continuing its previous statements of solid employment, expanding economic activity and strong household spending, marked the first time that it saw a slowdown in business fixed-asset investment growth, a sign that the central bank is concerned about the economic outlook.At the same time, recently, the federal reserve chairman Powell also believes that the U.S. economy will face three major challenges next year, including slowing overseas demand, the fading effect of domestic fiscal stimulus, and the lagging economic effect of the federal reserve’s interest rate hike.Indeed, with the formal tightening of global liquidity and the drag of trade frictions on the global economy, the future of the global economy will be tested, as will the us.
Given the likely weakness of the economy, the fed’s stated plan to raise interest rates three times in 2019 is likely to be watered down, but only at a slower pace.Historically, fed policy has been highly consistent, except in the event of a major recession or financial crisis.
By contrast, the pace of rate rises in other major economies will continue to diverge.The euro zone’s economic recovery has been weaker than that of the United States and has weakened this year, with the latest ECB meeting reiterating that it will keep interest rates at current levels at least until the summer of 2019. The ECB is not expected to start raising rates until the third quarter of next year at the earliest.In Japan, where inflation has been flat, it will take time for the boj to tighten.In addition to the “mainly stable” situation in Europe and Japan, Canada, Norway, Australia, Sweden, South Korea and other countries are raising interest rates or are about to do so, while Argentina, Turkey, India, Mexico and other emerging economies may be more passive in raising interest rates to protect their currencies.
For China, considering the changes in the internal and external environment, the monetary target has been gradually adjusted and optimized to ensure steady employment, steady growth and the bottom line of avoiding systemic risks since the end of July.Obviously, next year’s interest rate hike by the federal reserve will slow down, and the central bank of Europe and Japan will become more cautious in tightening, which will undoubtedly provide more room for China’s monetary policy to maneuver.
Post time: Nov-28-2018