Investors are tuning in to hear what the U.S. Federal Reserve will say (and how they say it) this week, when the Fed makes its next interest rate policy announcement on December 19th.
I'll certainly be among those paying close attention to the words spoken, as timing of future rate hikes will be vitally important to the outlook for the U.S. economy as well as global stock markets.
A key change
Since the great financial crisis, markets have been intensely influenced by the words of central bankers, and that's no different now as the Fed is widely expected to announce another rate hike, which would be the 9th since 2015.
What is different this time?
Fed Chair, Mr. Powell has been softening his tone around the determination to raise interest rates—from communicating that they may raise past the neutral rate (~2.75%) in early October, to more recently affirming that future decisions will be more data dependent and take the impact of current events into account.
The Fed's concerns about inflation appear to have been overblown. The risk of overshooting its 2.0% inflation target is low.
That's why, as I stated in my Globe & Mail column that debuted this week, inflation fears are overblown, and the Fed should pause in 2019.
The Feds core objectives appear to be in check
The Fed's policies serve two main goals: to achieve maximum employment and keep prices stable. Right now, U.S. unemployment is at a 50-year low (3.7%). And the Core PCE Price Index, the Fed's key indicator of inflation, was 1.8% year-over-year as of October–down from 2.0% over the summer.
Many factors are keeping inflation in check: Consumer prices have flattened, wage growth is below what it was prior to the financial crisis, productivity growth is low, and the U.S. dollar has been strong.
We see this as reason enough for the U.S. central bank to take a break from rate hikes in early 2019 to reassess the data—and its outlook.
Time to refocus on fundamentals
Markets have had a volatile year in 2018, with uncertainties around Brexit, Italy, emerging markets, and U.S. trade policy among other headlines creating headwinds.
If the Fed pauses in 2019, I do expect the market to refocus on fundamentals and deliver positive returns next year.
The words–and timing–of interest rate policy changes are important. That's why we assess all the economic factors that drive market risk and opportunities—not just this week's news cycle.
For more information about interest rates and how they affect your portfolios, please contact your MD Advisor.