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.
From the Port Phillip Publishing Library
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