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Will the Fed Raise Rates in 2019?

April 29, 2019 by

Guessing the future of interest rate changes is never an easy process, especially in uncertain circumstances such as we have now. The current expectations for the US federal funds rate changes in 2019 are quite diverse — from a rate hike possibility according to the latest (as of April 29) projections materials released by the FOMC, to a hold sentiment expressed by experts surveyed by the Wall Street Journal, to a higher than 60% probability of at least one rate cut according the fed funds futures rates on CME.

Target Rate Probabilities for December 11, 2019, Fed Meeting

Data

Inflation

The core components of the personal consumption expenditures is the Fed’s preferred method of measuring the US inflation when they assess fulfillment of their mandate. The sharp decline in core PCE seen since the start of this year is a bad sign for those who expect the FOMC to hike rates anytime soon:

US Core PCE - Monthly Changes (Annual Rate) from March 2018 through March 2019

Unemployment

One of the Fed’s goals is to keep employment at its maximum. This chart of US unemployment rate demonstrates that the maximum employment level might have been reached quite some time ago:

US Unemployment Rate from March 2014 through March 2019

The most recent non-farm payrolls report (released on April 5) was quite good, showing a steady pace of jobs creation.

This means that the low interest rates are no longer required to achieve this particular goal.

GDP

The GDP growth in the United States remains at a very good level for a developed economy. Apart from a trough visible in 2015–2016, the annualized quarterly changes stays either well above 2% or just slightly below that mark. Recent readings suggest a rising tendency, which strongly supports higher fed funds rate.

US Gross Domestic Product - Quarterly Changes (Annual Rate) from Q1 2014 through Q1 2019

Speeches

The speeches by the FOMC members suggest a some differences in opinions. However, nearly all of the recent talks mention the monetary policy as being in a good place. The topic of patience is also quite strong in the answers and statements by the Fed’s officials.

On April 11, Richard Clarida, the Vice Chair of the Board of Governors of the Federal Reserve System, discussed monetary policy in a CNBC interview. During that interview, he said that it is important for the Fed to see that the US inflation can get to 2% and stay there before tightening monetary policy any further.

On April 15, Eric Rosengren, the President of the Federal Reserve Bank of Boston, in his speech at Davidson College in North Carolina, mentions the lack of evidence that the inflation is going to reach the goal of 2% as a reason to be patient with the fed funds rate:

One reason for the policy committee’s decision to be patient in determining future rate adjustments, despite tight labor markets, is waiting to see more convincing evidence that inflation will achieve and sustain the 2 percent inflation target.

On the same day, Charles Evans, the President of the Federal Reserve Bank of Chicago, presented a speech at the NYABE Economic Luncheon. He mentioned core inflation signals as crucial to determining the further path of the interest rates:

In this scenario, the path for rates will depend crucially on any signals of an acceleration in core inflation.

On April 17, Patrick Harker, the President of the Federal Reserve Bank of Philadelphia, in a speech at the Greater Vineland Chamber of Commerce, mentioned that he sees one hike in 2019 as the maximum:

Accounting for all those factors — a strong labor market, muted inflation, sustained moderate growth, and the penumbra of uncertainty — I continue to be in wait-and-see mode, and my outlook for rates remains, at most, one hike for 2019 and one for 2020.

On April 18, Robert Kaplan, the President of the Federal Reserve Bank of Dallas, in an interview with the Wall Street Journal, said that the current interest range is appropriate and that he would need to see more data before deciding to make any changes to it:

My own view, though, right now is that a fed-funds rate in the range of 2 ¼ to 2 ½ percent is, I think, probably an appropriate policy setting for this economy.

Poll

My 2019 Forex forecast, which also mentioned interest rates, and which was published on January 1, points at two fed funds rate hikes to the range of 2.75%-3.00%. Now, this does not look as plausible as it did just four months ago. However, everything is data dependent, and I think that the Fed is now focused mostly on inflation signals, which still do not warrant any rate increases. With the recent PCE reports, it become really hard to see the core inflation indicators rising to 2% this year. To me, this signals that the Fed will stay pat in 2019. And what is your opinion?

Will the FOMC raise interest rates in 2019?

View Results

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The poll will expire on December 11 at 18:00 GMT — one hour before the rate decision is announced.

If you have a detailed forecast on how the US Federal Open Market Committee will act in 2019, please share it using the commentary form below.

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