Opening Statement from the October 2018 Dividend Gems 

Opening Statement from the October 2018 Dividend Gems 

Originally published on October 14, 2018 

As expected, the Federal Reserve raised its Federal funds rate to 2.25% on September 26. A fourth rate hike of 25 basis points in 2018 is highly likely to be announced during the Fed’s December meeting. We believe the Fed is moving along prudently given the most relevant macroeconomic variables.

Given the high probability of an additional 25 basis point rate hike in December, as well as a series of rate hikes totaling 75 basis points in 2019, we are likely to head into 2020 with short-term rates slightly above 3.00%. 

Moving forward investors should continue to monitor U.S. employment data and wage growth along with other inflation indicators such as the core PCE. We must also factor the extent of inflation as a result of tariffs. These variables will largely determine the pace of interest rate hikes over the next few years.  

When interest rate forecasts are discussed two key topics of current interest should be considered. The first topic relates to capital flows. We have been discussing the potential consequences of rising short-term interest rates in the U.S. well in advance of other nations. In short, the Federal Reserve can only raise short-term interest rates so much before the rest of the world is pressured to raise rates. Within this discussion it is most critical to consider capital outflows specifically from developing nations. Already, several developing nations have begun to raise interest rates in an attempt to neutralize the impact of rate hikes in the U.S. Although containing inflation could be more of a factor for rate hikes down the road, we believe the current impetus for rate hikes in developing nations is centered on improving currency stability. Finally, even advanced nations will need to begin raising rates over the next 12 months in order to minimize capital outflows.

The second topic of interest pertains to what short-term interest rate the Fed considers to reflect “neutral” monetary policy. This discussion has implications...