North America November 08, 2018 / 07:47 pm UTC

Fed Sticking With Gradual Tightening Trajectory

By David Sloan

The Fed’s statement today provided few surprises. The main adjustment was to note a moderation in business investment, which was necessitated by the Q3 GDP breakdown but worded in a way to avoid conveying weakness. We continue to expect the Fed to hike in December, followed by three hikes in 2019. 

There were few surprises in the Fed’s statement, with rates left unchanged including the IOER, where some minor speculation of a technical trimming had circulated.  The main adjustment to the statement was to note a moderation in business investment, something that the Q3 GDP breakdown made necessary. However, it was worded in such as a way as to avoid conveying any impression of weakness (a moderation from a rapid pace).  A minor hawkish adjustment was also seen, noting that unemployment declined rather than stayed low.

Looking at the statement, there is little reason to doubt that the Fed will implement another rate hike at its December meeting, even if by then it should be looking clearer that Q4 GDP will not match the strength of Q2 and Q3.  This will be also seen as a moderation from a strong pace, and as long as unemployment remains under downward pressure, growth will be strong enough to justify continued tightening.

The Fed did not give a nod to recent inflationary numbers having come in a little softer, simply noting that the core rate remains near 2% and inflation expectations are little changed (both unchanged from what the Fed saw in September).  Whether inflation accelerates or even slows modestly is more uncertain than a modest slowing in GDP growth, although we would lean toward a marginal acceleration, as that is what wages are suggesting. 

We continue to expect three rate hikes in 2019, occurring in the first three quarters of the year.  

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Certification
I, David Sloan, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.