Rate hikes: Is the cycle over?
Author: Andy Kochar
March 14, 2019
The U.S. Federal Reserve is now on hold after its “long way to go” comment in the fall spooked markets into thinking a number of rates hikes were still required to get back to the central bank’s neutral target. But in today’s climate of weakening economic data, it’s become highly debatable whether that means the current tightening cycle is over or just on pause.
While the Fed’s dot path of future rate hikes has been pared back in recent weeks, it still calls for two increases this year. Financial markets, on the other hand, now believe the Fed will remain on hold throughout 2019 and even predict a possible rate cut in 2020, according to Bloomberg data.
In other words, something has to give – either a sizable downward revision from the Fed is necessary or the market will need to rein in its more pessimistic predictions. So, who’s right?
History may provide some guidance on this front. Based on data going back 100 years, the last Fed hike of a tightening cycle is followed by a rate cut only eight months later, on average, with most instances occurring between three to six months after the final hike.
Last hikes, first cuts
With the most recent hike taking place in December 2018, that would suggest a rate cut coming sometime this summer, but this seems doubtful given macroeconomic and financial conditions are still relatively strong.
And while some level of economic sputtering should be expected through the first half of 2019 – as the combined effects of the 2018 Fed hikes and the diminishing tax reform boost are absorbed in U.S. data – such periods of weak growth are nothing new and have been witnessed several times in the past decade.
As a result, the Fed may well return to hiking as its dot path implies, but one rate increase this year – not two – seems increasingly likely and only after a prolonged pause, which, according to history, would push out an eventual rate cut even further.
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Written by
Andy Kochar, CFA
Portfolio Manager and Head of Credit
AGF Investments Inc.
