Tags: inflation | economy | rates | fed

Fed Will Hike Interest Rates Twice This Year

Fed Will Hike Interest Rates Twice This Year
(Dollar Photo Club)

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Wednesday, 27 April 2016 09:14 AM Current | Bio | Archive


Markets must consider politics a little more closely as events on both sides of the Atlantic Ocean add risk to markets.

In the eurozone, we got another political setback with the aborted Spanish attempt of trying to form a government. They are heading toward new general elections on June 26 with opinion polls suggesting an outcome that is roughly the same as the current state of the different parties.

The Spanish vote will happen immediately after the UK referendum vote on EU membership on June 23, which adds an additional complication to any assessment.   

As with the recent first round of the Austrian Presidential election and indeed the recent Dutch Ukraine–European Union Association Agreement referendum, the issue is likely to be the extent to which populist, anti-establishment, anti-EU parties are able to outperform.

Meanwhile in the United States, the presidential election is slowly starting to offer some clarity as to the likely candidates of the two main parties and the likely policy platforms on which the November election will be fought.

For the Democrats, Hillary Clinton has 90 percent of the delegates she requires for the nomination. On the Republican side, Donald Trump has just under 77 percent of the delegates he requires for the nomination.

Their key fiscal positions, as we know them now at present and given the state of play, it is likely that market attention will start to focus on:
  • Clinton’s plans of a 4 percent surcharge on adjusted gross income (AGI) above $5 million, requiring filers with AGI greater than $1 million to pay a 30 percent effective tax rate like i.e., under the “Buffett Rule,” limiting the tax value of specified exemptions and deductions to 28 percent, and increasing the estate tax.
  • Trump’s plans to reduce the current seven tax brackets, which range from 10 to 39.6 percent, into three brackets of 10, 20, and 25 percent while increasing the standard deduction to $25,000 for single filers and $50,000 for joint filers and indexed for inflation after 2015.
We also await the Federal Reserve decision on U.S. interest rates, but this is a difficult meeting from which to derive a clear message.

It is clear that FOMC members are divided over the Fed’s monetary policy.

No, this is not just “hawk” versus “dove,” but it’s about the ideology of monetary policy.

  • Should markets carry any weight in policy decisions when markets have an incorrect view of the world based on inaccurate data?
  • Should inflation expectations have any sway?
  • Should U.S. Central Bank policy being held hostage to the “reported” statistics of China or Brazil, or even the Euro area.
I don’t think so, but that’s what guides the markets today.

Will that go on forever? Again, I don’t think so.

I expect the Fed to raise twice this year amid improving growth and inflation that is above its long-term averages on most measures. Robust economic growth and inflation combine to form the perfect rationale for tightening twice this year.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
I expect the Fed to raise rates twice this year with improving growth and inflation that is above its long-term averages on most measures, which is for me the rationale for tightening twice this year and based on what we know today.
inflation, economy, rates, fed
516
2016-14-27
Wednesday, 27 April 2016 09:14 AM
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