When the Fed policy makers meet on Wednesday for the final meeting this year, they are expected to raise the overnight interest rates to a range of 2.25 to 2.50 percent. However the key will be what signals will the Fed be sending to the market regarding its next move. Will they indicate a slowing economy means fewer hikes next year? Will they continue to look forward and expect 3 hikes next year? They started hiking in December 2015 while the US economy has seen 3.0 percent growth in the past year and at one point saw growth at 4.0 percent. With low unemployment of 3.7% and stronger growth, the hike cycle that is currently underway did make sense.
There is a distinct possibility that the Fed stops hiking rates sooner than market participants think, perhaps in early 2019. What then happens to the short end? The yield curve plays will be numerous.
However, when we inject the growth possibility of a trade war – it will heat up in our view – and the likelihood of a slowdown in 2020 the number of moving parts in the US, China, Japan, and Europe seem to grow. With so many moving parts and even concerns about military confrontations in the South China Sea, the Fed will likely be a tad more cautious in the next 18 months. By that, we would think that hiking too fast would knock the economy into a tailspin, and that not what the world needs now.
Finally, one of our partners had dinner with a top equity strategist from Wall Street – visiting Tokyo last week – he made his point crystal clear by saying that in the next 18 months, he feels that the US equity market will see volatility and perhaps some sell-offs much like the ones we saw in November of 2018.