Opening Statement from the January 2019 Intelligent Investor
Originally published on January 10, 2019 (pre-market release)
Interest Rates
In the December 2018 Intelligent Investor forecasting webinar, we stated that although we felt the chance of a 25-basis point rate hike in December was 98%, we believed the Fed would issue a dovish statement in order to appease investors.
On December 19, 2018 the Federal Reserve raised the Fed funds rate by 25 basis points pushing short-term interest rate up to a range between 2.25 and 2.50%. Although Fed chairman Powell did in fact issue a dovish statement during the December meeting, his delivery was of insufficient substance to please investors. As a result, the capital markets mounted a severe selloff thereafter.
Looking forward we deem the Fed’s bias for two 25-basis point rate hikes in 2019 as appropriate assuming economic data comes in as expected. As stated in the December 2018 Intelligent Investor, we would be surprised if the Fed were to raise interest rates before June unless we see a trend of blowout data (e.g. a “three-peat” of the December jobs data).
Apparently, Wall Street holds a different view. Due to the especially weak December seen in the stock market, as of January 5, 2019, several Wall Street strategists and economists expect the next move by the Fed to be a rate cut (specifically Blackrock and Wells Fargo). Others believe the Fed will not raise rates at all in 2019. In contrast, as of December 2018, Goldman Sachs and JPMorgan expect the Fed to raise rates four times in 2019. We consider this forecast to be even more ridiculous than the rate cut expectations by Blackrock and Wells Fargo.
Although some economists still favor two rate hikes, the overall percentage maintaining this view has declined significantly since December. But the reduction has only come as a result of the recent volatility in the capital markets as opposed to weakness in the US economy.
It is important to emphasize that there remains no weakness in the US economy to justify cutting interest rates. At the same time, because the current Fed funds rate of 2.25% to 2.50% is at least 50 basis points below the estimated neutral rate, monetary policy remains slightly stimulatory. Given the strength in the US economy there is no need for monetary stimulus. If prolonged, this unneeded stimulus will lead to inflation which would most likely evolve into a recession.
In short, we believe those calling for a rate cut as the Fed’s next move are focusing too much on the stock market and/or yield curve and too little on...
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