Investment guru Jeremy Siegel reportedly predicts that the Federal Reserve will likely abandon its strategy of numerous interest rate hikes in 2019.
"The market is clearly worried about over-tightening of the Fed," the Wharton School finance professor recently told CNBC.
The U.S. central bank has indicated it plans three more rate hikes in 2019, in addition to an anticipated quarter percentage-point increase next month, which would mark the fourth hike since Trump-appointed Jerome Powell became chairman in February.
"The market is saying that the pace is a little too fast," he said. "It's not strong enough to take a 3.5 percent fed funds rate or higher next year."
Prospects for slowing global economic growth, fading U.S. fiscal stimulus and volatile financial markets all argue for more caution once officials lift rates next month near or into neutral territory, where policy neither spurs nor reins in economic activity, Bloomberg reported.
Investors have already reduced bets on how many times the central bank will hike next year, partly reflecting a more dovish tone from policy makers in the past week, though a move at next month’s meeting is still firmly priced with odds above 70 percent.
“December is probably too early for pause, but we could certainly see it in the first half of next year,’’ said Gene Tannuzzo, fund manager and deputy global head of fixed income at Columbia Threadneedle Investments. “Markets need to adjust to lower and slower, both in terms of growth and interest-rate increases.”
That would probably be welcome news for a stock market that is struggling to find a floor after selling off from record highs. The S&P 500 Index has fallen about 10 percent from a September peak on a variety concerns, from worries about the U.S.-China trade war to doubts about lofty valuations of technology shares. Corporate bond spreads have widened as well as investors have become more risk averse.
Federal Open Market Committee members in September provisionally penciled in three rate increases for 2019, according to their median forecast released at that time. They are due to update that forecast at their Dec. 18-19 meeting.
With stocks down and growth in Germany and Japan contracting last quarter, “I wouldn’t be surprised if the Fed backs away from the three hikes it has built into 2019,’’ said Donald Ellenberger, a senior portfolio manager at Federated Investors Inc.
To be sure, President Donald Trump has been the Fed's biggest public critic.
Trump renewed his criticism of the Fed on Tuesday, describing the U.S. central bank as a “problem” as he called for lower interest rates.
A homebuilder survey this week indicated the housing market is slowing further amid the highest mortgage rates in eight years, a possible warning sign for the broader economy.
“I’d like to see the Fed with a lower interest rate,” Trump told reporters in Washington. “We have much more of a Fed problem than we do with anyone else,” Bloomberg quoted him as saying.
Trump has previously blamed the “loco” Fed for causing steep stock-market losses with its campaign of gradual rate increases and demurred on whether he’d fire Powell. The president’s criticism shattered a two-decade White House tradition of avoiding comment on monetary policy out of respect for the Fed independence.
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