Absence of job cuts, increased wages and bullish markets are enough to keep the Fed on track in 2018

“America created fewer jobs than economists expected in December, with the addition of 148,000 non-farm jobs undershooting the consensus forecast of 190,000,” says AJ Bell Investment Director Russ Mould.

“However, this is unlikely to shake the Fed from its planned course of three more interest rate hikes in 2018, especially as job cuts in 2017 reached their lowest level since 1990* and wage inflated inched higher to 2.5%.”

Source: US Bureau of Labor Statistics

“The CME Fedwatch website puts less than a 1% chance on a Fed hike in January but a 73% chance on an increase to 1.75% on 21 March and a 32% chance of three increases to 2.25% by the Federal Open Markets Committee meeting scheduled for 19 December.

    % chance at FOMC meetings in 2018
Number of hikes in 2018 Fed Funds  Rate 31-Jan 21-Mar 02-May 13-Jun 01-Aug 26-Sep 08-Nov 19-Dec
0 1.25% to 1.50% 99.50% 26.60% 24.90% 7.50% 6.70% 3.50% 3.40% 2.60%
1 1.50% to 1.75% 0.50% 73.00% 70.20% 38.50% 35.40% 21.60% 20.90% 16.00%
2 1.75% to 2.00%   0.40% 49.00% 50.60% 49.40% 42.70% 41.80% 34.70%
3 2.00% to 2.25%       3.40% 8.10% 27.90% 28.50% 31.90%
4 2.25% to 2.50%         0.40% 4.10% 5.10% 12.70%
5 2.50% to 2.75%           0.20% 0.30% 2.00%
6 2.75% to 3.00%               0.10%

Source: CME Fedwatch

“While much depends on the policies preferred by new Fed chair Jerome Powell, who takes over from Janet Yellen in February, as well as the three new governors yet to be appointed by President Trump, the market may yet be too relaxed by putting such a low percentage chance on three increases this year.

“That is what the Fed outlined as its core scenario in December and it is possible to argue that firmer action is needed given how lively financial markets are becoming, with everything from stocks to commodities to Bitcoin to cannabis ETFs flying high.

“Asset-price inflation is every bit as dangerous as price hikes in the real world, as the market downturns and subsequent recessions of 2000-03 and 2007-09 showed and the Fed must be careful that it does not unleash market melt-up that leads to another market melt-down, so Powell has a tricky balance to strike in the year ahead.”

*Source: Challenger, Gray & Christmas job cuts survey

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