The Fed in 2019: more data-driven, not yet pausing

Highlights:

• We expect the Fed to deliver at most four more hikes. The one at the December 19 meeting will likely be followed by two rises in the first half of next year; the last one will depend on the state of the US economy at the end of 2019.
• As the cycle matures and the impact of past rates feeds through the economy, the Fed has to switch from a predetermined course to a more careful assessment of the economic prospects. In this sense the comments by Powell and Clarida reflected more a statement of the current conditions than a change in strategy.
• The switch to a more data-driven ratemaking occurs at a time when evidence of a moderation in growth starts to emerge and the risk of an inflation overshooting dims.
• Market reacted strongly, and now are underpricing the Fed’s resolve to stick to its plans. We expect a reassement, in line with our outlook of higher US interest rates, as data show a resilient economy with inflation grinding higher.

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