As expected the Fed ends up its year by increasing rates to the window 1.25% - 1.50%. It is finally the third time in the year that the US Central Bank increases rates. According to the monetary policy statement, expectations on the job market are strong with unemployment rate should drop below 4% in 2018. On top of that Fed forecast the growth to increase by 2.1% in 2018.
Now the Fed is on the line for another set of three rate hikes in 2018 which is something that was already predicted since last September. The pace of the rate hikes won’t accelerate from this year and as we mentioned several times in this newsletter, there is no reason for the Fed to do so as it would increase the pace of the rate hikes and it would likely create potentially massive disruption on many markets. We rather believe that the Fed will not be able to raise rates three times.
The only reason why the Fed promises so much rate hikes are the confidence they are trying to maintain in the dollar. The truth is that the Fed is not really on control of all the asset bubbles.
The keywords from the Fed are “low inflation” while we believe that inflation is actually higher than what the Fed is using for deciding about the monetary policy (3% versus 2% in our view).
The Fed clearly needs stronger inflation to kill the debt without raising rates that would burst bubbles. There are bubbles in almost every US asset class now. As a result our view for next year is bullish on the Eurodollar while the dollar may still enjoy a Christmas Rally until year-end on the fact that the “2017 Fed mission is accomplished”.
By Yann Quelenn