After the US Federal Reserve opted to keep interest rates unchanged this week, one City economist reckons the current market pricing of future hikes is too dovish.
In a note to clients on Thursday (2 August), Robert Bergqvist, chief economist at Nordic Bank SEB, wrote that he expects US interest rates to rise "every quarter" for the next 12 months to 3% by June 2019.
"The Fed continues to present upbeat assessments of the outlook for US growth and inflation. With current pro-cyclical fiscal policy, a labour market that generates payroll increases on average of 215,000 per month – far above what is needed to provide jobs for new entrants – and an inflation rate that runs close to 2%, current expansionary financial conditions justify a less expansionary policy," Bergqvist added.
At the next Federal Open Market Committee (FOMC) meeting on 26 September, the SEB expert expects the Fed to lift the target range by 25 basis points (bps); of which there is 90% probability according to current market pricing.
"Although US policy makers have little reason to rush to tighten beyond the neutral rate, US financial conditions remain surprisingly expansionary despite several rate hikes and the Fed’s downsizing of the monetary policy portfolio. This means that the FOMC can – and will – continue to hike rates without jeopardising the economic outlook. Our 12-month-scenario therefore implies a policy path that, after some time, probably moves modestly beyond neutral," Bergqvist opined further.
While US President Donald Trump has expressed that he was not "thrilled" about the Fed raising interest rates, as long as Congress' goal for monetary policy of maximum employment and price stability is fulfilled, Federal Reserve Chairman Jerome Powell and his colleagues will continue to deliver rate hikes in a gradual manner.
"But there is no doubt, the President would like to have a scapegoat if the economy starts to move in the wrong direction."
