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Economist: Despite The Plunge In U.S. Stocks, The Federal Reserve Is Likely To Raise Interest Rates In December.
- Dec 08, 2018 -

According to MarketWatch, the US stock market has been hit hard recently, interest rates have fallen sharply, and comments made by several senior Fed officials have become more dovish. But economists said Thursday that the Fed is still likely to raise its benchmark interest rate again in December.

Kevin Logan, chief U.S. economist at HSBC, said that in the summary of the November monetary policy meeting, the Federal Open Market Committee (FOMC) had "made it clear" that it planned to raise the benchmark interest rate in December. "Overall, their mantra has been that it is still appropriate to raise interest rates gradually."

Seth Carpenter, chief U.S. economist at UBS, agrees. He pointed out that, apart from believing that interest rates would be raised again in December, senior Fed officials "did not do much to guide the market".

Earlier this year, a handful of economists, such as Carpenter, predicted that the Fed would suspend interest rate hikes in December, but he said he changed his previous position to anticipate after the strong October non-farm employment report, which showed that the number of new non-farm jobs in the United States reached 250,000 in October. The Fed is expected to raise interest rates in December.

Carpenter said that in his previous forecast that the Federal Reserve would suspend interest rate hikes in December, he assumed that there were signs of a significant slowdown in economic growth, but that did not happen.

He also said that the comments made by Federal Reserve Chairman Jerome Powell at the end of last month were misinterpreted by investment. Powell said at the time that the benchmark interest rate of the Federal Reserve was only "slightly below" the so-called "neutral interest rate". He said the central concern of the Federal Open Market Committee was to bring the benchmark interest rate to a level that would not be met because the benchmark interest rate was "below" the neutral interest rate. "They also want to raise the benchmark interest rate a little bit more." He said.

For senior Fed officials, they still have some time to lead the market to expect no rate hike in December, but time is running out. The Federal Open Market Committee (FOMC) will hold a two-day monetary policy meeting on December 19, so senior Federal Reserve officials will enter a quiet period starting on Friday evening to stop making public statements.

Robert Kaplan, chairman of the Dallas Federal Reserve, said the Fed should be "patient" about further interest rate increases.

Gennadiy Goldberg, senior U.S. interest rate strategist at TD Securities in Toronto, said Kaplan's comments referred to the Fed's policy stance in 2019, not December. Goldberg said he calculated the market's probability of a December interest rate increase himself, saying it "has been well reflected in market pricing".

Goldberg calculated that the probability of the Fed raising its benchmark interest rate in December was 85%, slightly lower than the previous 90%.

Rogan of HSBC said the Fed "certainly" might not raise interest rates at its policy meeting in December. "It's not just about the economy, it's about a black swan." He said.

He said the market was concerned about international trade tensions, which put pressure on market expectations about the pace of global economic growth.

"The Fed must be aware of this. They may suspend interest rate hikes, but my view is that they will increase interest rates." Rogan said.

In Thursday's trading in the US stock market, the stock market fell for the second consecutive trading day, with the Dow Jones Industrial Average falling more than 700 points. Meanwhile, after hitting a high of 3.24% in early November, the yield on the benchmark 10-year Treasury bond has fallen to 2.85%.

There is no consensus among Wall Street analysts on the Fed's rate hike route for 2019. UBS's Carpenter now believes the Fed will suspend interest rate hikes after raising its benchmark interest rate in December.

Goldberg said his basic assumption was that the Fed would raise interest rates three times in mid-2019.

Rogan said he expected the Federal Reserve to raise interest rates twice in the first half of next year and then cut rates once in the second half of next year.