This week the financial markets were able to enjoy a relatively calm few days. Tariff fears involving the United States and China are currently cooling off, as it seems that the US is reconsidering its rhetoric, while China only reacts to whatever the United States does. Even the issue with Syria does not seem so serious anymore: the United States will not impose sanctions on Russia for now, which means that we are not likely to see any countermeasures from Russia either. This basically leaves us with good old-fashioned economic reports taking center stage this week.
It has been over a month since the US Federal Reserve chose to hike interest rates in the States. Considering that investors were promised three hikes in 2018, now the speculation has begun as to when the next increase would take place. With rising inflation, it seems that the Federal Reserve have the economic prerequisites they need to implement another hike and tighten the economy.
Nevertheless, there is some concern regarding rushing things from within the Federal Reserve. On Wednesday the president of the St. Louis Federal Reserve James Bullard spoke about a somewhat unsettling development with US treasury bonds. With each previous hike the treasury yields have flattened little by little, and now the trend is nearly flat. Bullard explained that after flattening, the trend could dip downward, which is a signal of poor economic health and an early sign of a recession.
Essentially, what Bullard is trying to say is that based on economic practice and experience, raising interest rates too quickly could harm the American economy and bring about a recession. We need to remember that despite the stellar statistics, the United States (and the rest of the world, for that matter) is still in recovery mode after the 2008 global economic crisis. This is why the Federal Reserve needs to tread lightly into hawkish territory.
On the other hand, the American stock market is doing quite well and analysts expect it to continue in a similar vein throughout 2018. How would this be affected by interest rate increases? Well, traditionally rate hikes are not exactly good for companies, since they make borrowing money from banks more expensive. The increased spending leads to a decrease in stock value, not to mention the fact that some traders might lose an interest in stocks altogether and set their eyes on strong currencies instead.
Nevertheless, is it not expected that this year’s hikes would be bad for the US stock market. Equities are strong right now and if the interest rate increases are implemented slowly and gradually (as the Fed has vowed to do), then it is likely that the stock market would be able to adjust and react in a timely manner.
Furthermore, it is important what relationship President Trump has with the Federal Reserve. Back during his election campaign Trump criticized the Fed of being too slow with rate increases. However, after he became president it appears that he turned to the other pole: now he has been pushing for a cheaper dollar and low borrowing costs, i.e. no hikes. His administration, while staying quiet on the issue throughout 2017, has already expressed concerns over 2018’s scheduled hikes, even claiming that there is no need for them since inflation is still low, reports the Financial Times.
The Federal Reserve is independent and is under no obligation to comply with the President. However, a public dispute between them on monetary policy could have a negative impact on investor confidence.