Where Is The Fed Heading With Rates? Pause in 2019 Likely.
So where exactly is the Fed heading with interest rates? Conventional wisdom, before the stock market volatility of the past few weeks had dictated a December increase and 2-3 increases (all of a 1/4 point) in 2019. Fed guidance has indicated that a December rise is likely to 2.5% as well as a slow and steady trend to 3.0% in 2019 and 3.5% in 2020. Although my advice would have seemed more sage if I had written this a few weeks ago, I think there is significant reason to doubt that we are on such a steady trajectory.
Whispers of a recession are growing slowly and louder. Sometimes this fear becomes a self-fulfilling prophecy. There are significant risk factors moving forward. Stock market volatility, which we have seen plenty of recently, makes people nervous and more conservative with their money. We have also seen significant volatility in the White House where the current administration's policy could flip on a whim, and flip back as quickly. Our trade situation is in flux. Will a skirmish turn into a war? With the conclusion of the Mueller investigation will we end up in a constitutional crisis? Tax cuts largely benefiting corporations has shown very little trickle down to the average worker while the limiting of State and Local tax deductions has resulted in significant damage to the wealthiest real estate markets in the country. How will that impact spending?
Finally, as I have mentioned before, election years are notorious for slowdowns in big ticket purchases as the public waits to see what direction the country takes in the following four years. Uncertainty and fear are negatives for the economy and these concerns are increasing.
This brings me back to the original point. My outlook for the Fed Funds rate would project a top during 2019 at 2.75%. This represents 2 increases between December and the 1st half of 2019. Timing will be a guessing game. I believe that there will be a change of perception by the middle of next year that a recession is either likely, or imminent. This is not all bad news though. With rates as low as they are, they should act to limit the extent and duration of any recession that starts in 2020.