Rate hikes in 2019 by the US Fed will be data driven

After four increases in 2018, the Federal Reserve expects two more rate hikes in 2019

BL Research Bureau

The US Federal Reserve increased the interest rate on Wednesday as expected by 25 basis points. This is the fourth hike for this year and the interest rates now stands in the range between 2.25 per cent to 2.5 per cent, up 100 basis points from 1.25-1.5 per cent in December 2017.

However, the Fed has lowered its forecast for future rate hikes in 2019 to two, from three projected earlier.

2018 – The strongest year

“The year 2018 has been the strongest since the financial crisis,” US Federal Reserve Chairman Jerome Powell reiterated several times in his press conference on Wednesday. This has been one of the major reasons for the Fed to increase rates at a much faster pace in 2018 than was initially anticipated. In December 2017, the Fed had projected for three rate hikes in 2018, but it delivered four increases this year.

However, considering the recent volatility in the financial markets and weak economic data releases outside the US — which has increased concerns of a global slowdown — the Fed has made slight variations in its forecast for 2019.

The Fed expects the US to grow at a rate of 2.3 per cent, down from its earlier projection of 2.5 per cent. It has also revised lower the Core Personal Consumption Expenditure (PCE) inflation for 2019 to 2 per cent from 2.1 projected earlier. The median fund rates in 2019 are projected to be at 2.9 per cent, down from the earlier forecast of 3.1 per cent. That is, as per the current projection, 2019 will see two rate hikes as against the three increases projected in September.

2019 - Data to decide

The Fed has clearly indicated that the policy decisions going into 2019 will completely depend on the incoming data.

At the moment, the uncertainty in the financial markets and the concerns of a global slowdown seems to be weighing on the Fed’s decision. “We know that the economy may not be as kind to our forecasts next year as it was this year,” said Powell in his opening statement.

However, things may turn-around. If data releases make 2019 another strong year like 2018, then the Fed may increase the rates more than two times next year.

Currencies stable

The US dollar index made a sharp bounce from 96.6 to 97.1 immediately after the Fed meeting outcome. However, the index has come-off slightly from the high and is currently at 96.95. The index is continuing to trade within its broad 96-97.7 sideways range. The index has been stuck in this range since late October and is likely to retain this sideways movement for some time.

The Indian rupee opened with a gap-down against the US dollar on Thursday at 70.66 following the Fed meeting outcome. However, the currency has reversed higher from the day’s low of 70.68 recovering almost all the loss and is currently trading at 70.45.

The rupee can remain range-bound between 70 and 71 in the near term. A breakout on either side of 70 or 71 will determine the direction of the next move.

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