By Shane Oliver, Head of Investment Strategy & Chief Economist from Oliver’s Insights, AMP Capital, 14 December 2017
- The Fed has raised interest rates for the fifth time since first raising rates this cycle two years ago, taking the Fed Funds rate from a range of 1.0-1.25% to 1.25-1.5%. This reflects the ongoing strength of the US economy.
- Given ongoing low wages growth and low inflation, further Fed hikes are likely to remain “gradual” for now, but the pace of tightening is likely to speed up in 2018 as spare capacity continues to be used up and inflation risks are rising. Expect four Fed rate hikes in 2018.
- It’s too early for US monetary tightening to be a cyclical negative for shares, but it may start to cause more volatility in 2018 as the pace of tightening speeds up.
- Continuing Fed rate hikes, ongoing Quantitative Tightening and US tax cuts in 2018 will likely be a source of upwards pressure on US and global bond yields and on the US dollar.
- With the RBA on hold, US interest rates will soon rise above Australian interest rates likely resulting in a further decline in the value of the $A, notwithstanding short term bounces.