Will the Federal Reserve Raise Interest Rates Nine Times?

Will the Federal Reserve Raise Interest Rates Nine Times?

Then there’s the US interest rate hike that is due tomorrow. It’s all but guaranteed. With the rate hike locked in, the focus will be on the Fed’s statement and their thinking on when the next hike is coming.

The Fed first raised rates in December 2015, and then again in December 2016. If March 2017 is the next hike, then you should probably expect another around June.

How many more come after that in 2017 is anyone’s guess.

But if forecasts of a strengthening US economy prove to be true, then you could see a number of additional rate rises without it having a major impact on asset markets.

True, the highly indebted nature of the global economy means that it is much more susceptible to higher interest rates than it was previously.

As I’ve pointed out before, when the US went through it’s last rising interest rate cycle after the dot-com bust, the Federal Reserve increased official rates 17 times. 17 times!

Here we are now, (nearly) three rate rises in, and there is concern that the Fed will go too far. There’s little doubt the Fed eventually will go too far. Interest rate rises are nearly always the catalyst for an economy going into recession.

But if history is any guide, we’re still some way from that point.

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Let’s guess and assume the economy can handle half as many rate increases as occurred during the last cycle. We’ll round it up and make it nine rate rises.

From the low of 0.25%, that would take official rates in the US to 2.5%.

That shouldn’t be too onerous for a fast growing economy, right?

After all, the OECD predicts the US economy will achieve nominal economic growth (that’s real growth plus inflation) of 4.2% in 2017 and 5.5% in 2018.

So a nominal official interest rate of 2.5% when the economy is growing at a nominal rate of around 5% is still very accommodative, right?

Indeed it is.

The question, however, is will nominal growth get that high? Thanks to weak real growth and low inflation, nominal growth was only 2.8% in 2016. Will it double in two years?

Each interest rate rise the Fed administers will take a little momentum out of the economy. If it raises rates too fast, growth may stall.

So let’s think about it. From what we know of the Fed, they are far more likely to err on the side of caution and keep the rate rises coming very slowly…at least for this year and into 2018.

Only when inflation starts to get entrenched will the Fed panic and raise rates faster. And that will cause the next slowdown/recession in the US, and probably global economy.

My best guess is that this will happen sometime in late 2018.

Regards,
Greg

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Greg Canavan

Greg Canavan

Greg is the Managing Editor for Money Morning. He helps investors preserve their wealth over the long term using a method known as value investing. Lucky for Money Morning readers, he imparts some of this knowledge on them three times a week with editorial spots.
Greg Canavan is a feature Editor at the Money Morning and is the foremost authority for retail investors on value investing in Australia.
He is also the Editor of Crisis & Opportunity. An investment publication designed to help investors profit from companies and stocks that are undervalued on the market. Greg is the former head of Australasian Research for an Australian asset-management group and has appeared on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. He has written articles for The Sydney Morning HeraldThe Australian and www.ninemsn.com.au. Greg’s aim is to help you create a portfolio of stocks based on sound, proven, investing principles. His system for identifying stocks trading beneath their ‘intrinsic’ value combines a big picture understanding of the financial markets with a thorough valuation analysis of individual securities. Greg’s method of investing is not about taking huge risks and rushing into big positions. He investigates highly profitable companies trading at a reduced premium to their net asset value, or ‘equity’ value as he puts it – and passes that research on to his subscribers to incorporate into their financial plan as they see fit. With Greg’s help, you can implement a long-term wealth building strategy into your financial planning, be better prepared for the tough financial challenges ahead and stop making the basic, costly mistakes that most private investors make every time they buy a stock. To find out more Greg’s investing style and his financial worldview take out a free subscription to Money Morning here. And to discover what a company’s profitability reveals about its true value…and more importantly how you can use that knowledge to become a better, smarter investor, take out a 30 day trial to his value investing service Crisis & Opportunity here. Official websites and financial eletters Greg writes for:

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