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Fed Vice Chair: December Hike Coming, but 2019 Up in the Air

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Tuesday, November 27, 2018

The new Vice Chairman of the U.S. Federal Reserve, Richard Clarida, has taken to the podium early this morning in New York, with a message for market participants likely designed to be ruminated between now and when Fed Chair Jerome Powell gives his speech tomorrow afternoon. That message, at least at first blush, is that a quarter-point rate hike in December is still imminent, but that beyond is open to discussion.

Beyond standard language such as “U.S. economic fundamentals remain robust” and “the U.S. labor market is healthy,” he said “interest rate hikes are still necessary” and “inflation is art or near 2%,” which the Fed has long considered optimum. He also added a key word to a previous Federal Reserve opinion, and that is “interest rates are ‘just’ below longer-running estimates.” This suggests Clarida thinks monetary policy has gotten close to its target.

So while he is signaling, kindly, that another 25 basis point-hike is coming next month — thus pushing the nominal rate to 2.25-250% — he is also suggesting that the next hike (or “first” of calendar 2019) has not yet been decided. Analysts had previously been looking at March for that next quarter-point rise, but perhaps this means June instead.

June is far enough away that other economic developments might accentuate future Fed moves based on incoming data. Not that they don’t usually, but use 2018 as an example — the main question was not that there would be three certified rate hikes on the year, but whether there would be a fourth as well. For next year, we see no firm number of hikes currently.

Clarida had kind words overall for the state of the U.S. economy, rightly pointing out that “2018 GDP represents the fastest growth of expansion” in our long-term recovery into bull market. Speaking of GDP, we see our first revision to Q3’s initial figure of 3.5% tomorrow morning. Many analysts see this bumping up to 3.6% or so.

For the three quarters averaged so far this year, we’re currently standing at 3.3% after a robust 4.2% in Q2. What remains to be seen is if the strong Q3 figure will have pulled productivity from Q4 based on forthcoming trade tariffs, as well as higher interest rates.

The Case Shiller home price index for September — a lagging indicator, but historically a very accurate one — came out flat month over month at 5.1% from year-ago price levels. Analysts had been looking for growth in overall prices and 20 basis points or so higher in its September tally. Las Vegas pricing led the way with 13% year-over-year growth, the only major city up double digits in this report, though San Francisco posted 9.9% yearly growth.

Overall, home prices had begun to tumble notably following multi-year highs in March of this year, which hit +6.76%. Laggards this time around included Chicago, down 1% to +3% year over year, and Seattle down 1.3%, but to a still-strong +8.4%. But although we’re seeing some of the air coming out of the housing balloon these days, we’ll prefer to take a flat month over month read as a sign of consistency rather than stagnation.

Mark Vickery
Senior Editor

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