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Investors Must Brace for Up to 3 Fed Rate Hikes This Year

Investors Must Brace for Up to 3 Fed Rate Hikes This Year
(Dollar Photo Club)

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Wednesday, 03 January 2018 07:55 AM Current | Bio | Archive

Today, we’ll get the always useful minutes of the latest FOMC meeting of the Federal Reserve. The meeting raised rates of course and was Fed Chair Yellen’s final meeting.

Besides that, we have now the prospect of a non-economist running the Fed in the future, assuming that President Donald Trump's nominee to replace Janet Yellen as Federal Reserve chair Jerome Powel is confirmed by the full Senate after that the Senate Banking Committee already voted 22-1 on December 5 to approve the nomination of Jerome Powel as Fed chair .

One of the key issues for investors is is how many rate hikes we are likely to see in the U.S. in 2018.

The market is being rather cautious in its assessment, at least so far. The Fed is not trying to slow growth, but it does mean to maintain a balance on the monetary side of the economy, about what would seem to warrant to two or three rate hikes.

With the turnover of Fed policy makers that we have, we need to be a bit cautious about reading too much into the discussions of last December as the composition of the Fed could change significantly over the remainder of this year and regional Fed Presidents will have a majority on the FOMC for a while.

Besides that, today, we’ll get in the U.S. another “opinion” poll with the ISM manufacturing index which is a collection of sentiment data of more than 300 manufacturing firms.

Now, since 2010, the ISM’s manufacturing production index has been “negatively” correlated with manufacturing output. The ISM’s employment index has been “negatively” correlated with manufacturing employment. The ISM’s inventory index has been “negatively” correlated with manufacturing inventory.

No doubt, the media will report what the ISM press office tells them to report without questioning whether their opinion poll survey of an unrepresentative sample is actually the same as reality. Investors could do well keeping that in mind.

Meanwhile, the UK government, which is leaving the supranational trade organization next door that is the European Union (EU) is reported to be considering joining a supranational trade organization on the other side of the world.

There are reports that the British government would like to join the “Trans Pacific Partnership,” which would involve taking back control from the EU to give control to Asia.

Please take note that the Trans-Pacific Partnership (TPP) has been changed to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) after the U.S. withdrew.

In the UK's intention to join the TPP, there is some logic in this because of the fact that the UK is a predominantly service exporting nation that does not actually need to be next door to its trading partners.

The fact that the globalization of physical products is likely to reverse with the fourth industrial revolution, also makes geography less relevant.

However, the same trends also pose more economic challenges for Asia than they do for Europe.

In the Euro area we had the release of the German unemployment data that fell slightly to 3.6 percent in November 2017 from an upwardly revised 3.7 percent in the previous month. It was the lowest jobless rate since October 1980, as the number of unemployed declined further while employment was unchanged.

This is of limited interest to investors we got the update of the German labor market that remains strong and continuous to provide support to the German consumer. It is a situation that is not expected to change anytime soon and the absence of a coalition deal for a German government is absolutely no threat, because it turns out that the economy can carry on perfectly well without politicians for quite some time.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The market is being rather cautious in its assessment, at least so far. The Fed is not trying to slow growth, but it does mean to maintain a balance on the monetary side of the economy, about what would seem to warrant to two or three rate hikes.
investors, fed, rate, hike
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2018-55-03
Wednesday, 03 January 2018 07:55 AM
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