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Federal Reserve likely to raise rates in December, to adopt three more in 2019: DNB Markets

The Federal Reserve is expected to raise rates again at its monetary policy meeting scheduled on December 19, along with three more rate hikes in 2019, according to a recent research report from DNB Markets.

In a speech last week Chair Powell said that interest rates "remain just below the broad range of estimates of the level that would be neutral for the economy". This was regarded as a dovish statement, indicating that the need for further hikes has been reduced. In particular, the statement seemed more dovish than Powell said in an interview in early October: "…we are a long way from neutral at this point, probably".

Furthermore, the Fed dot-chart from the September meeting showed that the median estimate of the long-run federal funds rate was 3.0 percent. Hence, Powell’s recent speech may not necessarily indicate that the Fed’s view of the neutral rate has been lowered.

The drop in equity markets, higher credit spreads and increased volatility have weakened financial conditions this autumn. However, the decline in conditions is relatively modest, in line with that in March this year. Even if the Fed has paid heed to the market unrest, the negative impact on the economy seems small.

"Up to now we have expected four more hikes from the Fed in 2019. In accordance with the likely lowering of the estimate for the neutral rate (discussed above), we have now reduced that to three, in March, June and September, respectively. Obviously, this expected rate path is data-dependent, and the Fed may want to pause if e.g. financial turmoil escalates or the macro data deteriorates," DNB Markets commented.

Meanwhile, the market is only pricing in one hike in 2019. The 10y-2y yield curve which has been a good recession indicator has fallen further and is almost negative. However, even if it were to invert soon, it will normally take 1-2 years before a recession starts. Hence, a recession does not seem likely in 2019, the report added.

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