Capital Economics: Fed will leave rates alone – for now

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The Federal Reserve will leave rates unchanged when it concludes its January meeting next week, likely referencing its “patient” stance when it comes to rate hikes, Capital Economics said in a report released Wednesday.

But while a hike in March is likely off the table, Capital Economics predicted that one more hike is yet to come.

“With equity markets rebounding from their recent lows, economic growth solid, and core inflation close to 2%, we still think the Fed will raise rates once more, either at the April/May or June meeting,” the report stated.

The group also noted that it expects a sharp downturn in economic growth will have the Fed reversing course in 2020, cutting rates by 75 basis points.

“In the second half of the year, however, we expect a sustained slowdown in economic growth to well below its 2% potential rate, which will force the Fed to the sidelines and ultimately to cut rates in 2020,” the report stated,

Minutes from the Federal Open Market Committee’s December meeting reflected that “most” participants thought the committee could afford to be patient about rising rates, according to Capital Economics, which said that considering this shift in tone among most officials, raising rates again in March would be a “huge stretch.”

Capital Economics said that while the government shutdown has impeded the release of data to reveal a full picture of the economy’s health, a December surge in payroll employment and manufacturing output indicates that the economy ended 2018 on a strong note. Any evidence of softening, it said, has been happening at a high level.

“Nevertheless, it’s premature to conclude that the Fed is finished raising interest rates altogether, as markets appear to have done,” the report stated, noting that median projections estimate two rate hikes in the year ahead.

“We think that economic growth will remain close to its 2% potential rate, and any hit as a result of the government shutdown should be quickly unwound once it reopens,” Capital Economics said. “Core inflation is unlikely to rise further, but that hasn’t stopped the Fed from hiking rates in the past, especially with the unemployment rate unusually low and still on a downward trend.”

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