Tuesday, June 6, 2017

US Fed To Hike 3 More Times In 2017


So says Capital Economics' Chief US Economist, Paul Ashworth. More key take-away's from yesterday's Capital Economics Annual Conference:

Monetary Policy (US):
  • Another 0.75% of tightening this year.
  • Fed Funds rate 1.50% to 1.75% by end of 2017.
  • Rate to peak at 2.75 to 3% in 2019 H1 (first half).
  • Balance sheet normalization to begin "later this year".

Trump Agenda:
  • Tax reform will be modest and delayed until next year.
  • Congress also needs to deal with 2018 budget (by Oct.) and debt ceiling (by Aug.).
  • White House progress hampered by scandal and incompetence.

Conclusions:
  • Economy is set to grow at a decent pace this year.
  • Federal reserve to raise rates faster than many expect.
  • Tax reform still more likely than not.
  • Another recession is coming, the question is when?

With a caveat on the recession date: Paul Ashworth said 2019 with tax reform, 2nd half of 2018 without it.

Interestingly, there was little mention of the record amounts of US household debt, which with three 1/4% interest rate increases, should have an impact on the consumer with an increasing cost to servicing their debt.


My take was that they (Capital Economics) expect that the consumer will remain capable of spending by saving less: with improving household wealth (housing price increases and equity market strength) as well as further job growth expected to lead to higher incomes (but not yet, in the most recent data, anyway).

I will let the experts debate the possible outcomes, but I would suggest that herein lies some pretty significant risk that may be impactful on future consumer spending (US consumer is 2/3 of the US economy) and US economic growth outside of the political issues. 

As always, our job for our clients (at High Rock) is to identify risk, assess it and build investing strategies around it. That is not something you will get with a "buy and hold" or "Robo" portfolio structure. 

All this and more to be discussed on our weekly client webinar today, the recorded version which we will post on our (High Rock) website at or about 5pm EDT.

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