WSJ with a neat article on the 2018 outlook for the Fed and its tightening cycle
December this year surely is a done deal with regards to a rate hike by the Fed. But what's important now is how many times the Fed is expected to raise rates in 2018?
If they do act in December, they've met their target this year - which is 3 hikes and a balance sheet runoff. In September, Fed officials outlined 3 more hikes for 2018. Will they stick to it in December's projections?
The major stumbling block that's holding the Fed back is inflation. Ideally, as job growth improves and unemployment rate falls, the Fed would want a scenario where wage growth and inflation to pick up. But tighter labour market so far has failed to generate that ideal scenario in 2017 and this poses some risks to the Fed.
Here's what WSJ has to say on those risks:
The first is the unemployment rate drops too low, too quickly, leading to an unsustainable rise in prices that forces the Fed to raise rates at a fast clip, triggering a recession.
The second risk is inflation doesn't respond as expected but the Fed keeps raising rates because unemployment falls lower. This could push inflation even lower still and hold back the economy. Persistently low inflation in the end would force the Fed to cease any rate increase campaign and could leave it with little room to maneuver should another recession hit.
The third risk is the economy avoids an inflation run-up but rising asset values and low market volatility fuel financial imbalances. The last two expansions ended this way, with the tech-stock bubble of 2000 and the housing-market collapse of 2007.
The full article can be found here. May be gated.
Prior to the FOMC meeting in December, the best gauge we may get on what to expect for 2018 will be Jerome Powell's confirmation hearing tomorrow.
Let's see if he offers any early insights into the matter.