While the US growth model was the envy of so many countries in 2018, the painful reality of a global slowdown will hit a growing list of economies in 2019 and 2020, and the US will not be able to dodge this bullet It will slow with China, Japan and Germany. In fact, the US growth was so strong in 2015 to 2018 with GDP at 4.0 percent (at one point) and unemployment falling to 3.7% that the Fed had no choice, it had to hike rates starting back in December 2015. Rate hikes are good is it is a way for the Fed to slow down an overheated economy or in more common words, it had to pump the brakes as the economy was moving too fast, and there was growing fear of uncontrollable inflation.
More importantly, the Fed saw the inflation rate move to 2.0 percent as measured in the personal consumption expenditures index. Clearly the Fed makes mistakes, and sometimes it makes a lot of mistakes but with growth increasing and unemployment decreasing while inflation jumps to 2.0 percent, the balancing act becomes more difficult. But give us more details please……
The recent drop in bond yields act as a offsetting factor for tightening but the yield curve flattened and this is usually a sign of weakness in the future. So the idea of rate hikes in 2019, which were a given just 3 weeks ago, is now in question. It might be that the Fed is forced to pause its hikes and sit back and watch for a weaker economic period in the US and Europe. This is becoming likely by the minute….now what?
The US dollar could see, and in our view at Classiarius, is already seeing a reversal. The China Trade Deal is possible (but we think later in 2019 or 2020) and the Fed ending the tightening cycle. If the Fed does stop hiking rates, the US dollar could break down to 105.00 to 106.00.
By December 2019, there will likely be an economic slowdown in the US, Japan, Germany and China, with negative impact globally.