American Consequences - September 2018

EDITORS John Gillin Greg Diamond Scott Garliss

thinking. Powell struck a cautious tone for the first time since he became chair. The Fed looks to be reaching a point where it no longer needs to continue the current rate- hike path. Although two more rate hikes this year seem certain, if the Fed only requires one – possibly two – next year to achieve neutral, this would ease the case for owning the greenback. And, adding one more twist, this is what may take place at the European Central Bank (ECB) next year. When ECB chair Mario Draghi steps down in Fall 2019, the bank will need to select his replacement. With Spanish Economy Minister Luis de Guindos already selected as vice- president, the thinking is that the ECB will choose a chair from Northern Europe. This would better represent the entire continent when it comes to policy decisions. German Bundesbank head Jens Weidmann would fit that bill, and

A CHANGE IN TONE FROM THE FED This month, we also saw changing dialogue from the Federal Reserve. It began with comments from Dallas Fed president Robert Kaplan. Kaplan is hawkish (inclined to hike rates) in his tendencies and is not a voter on the FOMC this year, so he has limited direct influence on monetary policy. Kaplan cautioned the central bank was getting closer to a neutral policy (neither helps nor hurts economic growth). He said three or four more rate hikes of 25 basis points and we’re there. At that point he feels the Fed needs to reassess its course. The market has built in two more hikes this year. And next year, the Fed’s own dot plot forecasts three. So, based on the math laid out by Kaplan, the Fed only needs to hike one or two times in 2019. One theory making its way around Wall Street is that policy divergence – the Fed hiking rates while other central banks are neutral – is ending. Fed chair Jerome Powell’s Jackson Hole speech lent further credence to this

given his pragmatic nature and recent commentary regarding a pull back on stimulative measures, that could fuel a euro rally versus the dollar and prove to be a positive for global markets.

The Fed looks to be reaching a point where it no longer needs to continue the current rate-hike path...

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