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How Many Interest Rate Hikes Inbound in 2018?

With the Federal Reserve now under the leadership of recently sworn-in new Fed Chair Jerome Powell, many are watching to see how he deals with the challenges of the current market, and how his responses and philosophy will differ from his predecessor, Janet Yellen. After leaving the benchmark interest rates unchanged at Yellen’s final meeting of the Federal Open Market Committee (FOMC) in January, many are expecting a rate hike in March. But how many more are to follow in 2018? Among surveyed economists, the expected number is trending upward.

The Fed previously increased the benchmark interest rate to a range of 1.25 percent to 1.5 percent during the December 2017 FOMC meeting. According to a Bloomberg flash survey of 29 respondents conducted February 12-14, a growing number of economists expect the Fed to increase interest rates four times in 2018, rather than the three times that had been the general consensus before. According to Bloomberg, “That brought the survey’s median estimate for the upper bound of the central bank’s federal funds rate target to 2.5 percent by year-end.”

“Stronger growth and higher inflation would increase the odds of four Fed rate hikes in 2018,” said Greg Daco, Chief U.S. Economist at Oxford Economics, one of the surveyed economists.

This shift from three rate hikes to four also jibes with recent predictions by Credit Suisse, whose U.S. economists said in a research note released last week that, “The FOMC has already boosted their growth outlook for 2018 in light of the tax bill passed in December and we anticipate another upward revision to their growth forecast at the March meeting. With the economy near (or above) full employment, prudent risk management suggests the Fed ought to accelerate their tightening in response to a large positive demand shock.”

Joel Naroff, President of Naroff Economic Advisors Inc., predicted that the combination of the recent tax reform bill, governmental spending increases, and a potential federal infrastructure package would likely encourage the Fed to take action. “The tax cuts, spending increases and potentially infrastructure package are likely to accelerate inflation and cause the Fed to raise rates higher and faster than expected,” Naroff said.

Goldman Sachs economists have been predicting four rate hikes in 2018 since last November, when they said in a research note that “We expect that a tight labor market and a more normal inflation picture will lead the Fed to deliver four hikes next year.”

The economists Bloomberg surveyed also predicted continued economic growth, with the gross domestic product expected to expand 2.9 percent in 2018 and 2.5 percent in 2019. The GDP has averaged 2.2 percent growth since mid-2009.

About Author: David Wharton

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