Yesterday, the Federal Reserve raised the benchmark interest rate by 25 basis points to a target range of 2.25–2.5%.
As a result, the Aussie dollar promptly slumped:
While the market had seen this move coming from a mile off there were some intriguing takeaways from Chairman Jerome Powell’s comments.
Slightly dovish language on interest rates
Now to the Fed’s comments (emphasis mine):
‘The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.’
Market analysts are now attempting to read the tea leaves and central bank officials are forecasting two rate hikes in 2019.
Many see this as a slightly dovish stance.
President Trump was clearly unimpressed:
Federal Reserve could hike rate just once
A few points to make about the prospect of further rate hikes.
Rate hikes are a good thing generally, they provide the basis for a more sensible, sustainable economy that rewards saving over debt.
Europe and Japan’s dalliance with negative interest rates was a perversion of the most basic economic principles.
Global debt is skyrocketing:
The problem here however is that the Federal Reserve probably should have raised rates earlier — maybe somewhere around late 2016.
The US economy was showing signs that it was set to bounce back and had plenty of juice at this stage.
We might not have seen the same impressive growth or a runaway Dow.
But at least we would have had a bit more ammunition when growth inevitably slows.
We are unlikely to see a return to the good old days where you could actually grow your wealth via things like a term deposit.
Nowadays you are lucky if you can beat inflation.
Looking forward, there is a real risk of a global recession.
And finally, we will finish with a bold call:
Next year, the Federal Reserve will hike rates once, not twice, in response to a slowdown in growth. If they do hike rates twice, a quick reversal could be in the offing.
For Markets and Money
PS: Interest rates could hover at these super-low levels for the next 100 years…but this four-pronged strategy could help you avoid the fallout. You can download the report for free here.