There are indications that the Federal Reserve will not bow to Donald Trump and refrain from the gradual increase in US interest rates after the US President said in the depths of last week's sell-off that the central bank is "out of control".
Fed policy makers have made it clear consistently, and more particularly in a more and more singular voice, that interest rates will continue to rise over the next year, and given the strength of the US economy, interest rates are likely to be at least marginally more restrictive.
What is not yet clear is how high the interest rates have to be to reach a level that the Fed sees as neutral – where interest rates neither support nor dampen the rate of growth – because interest rates have already risen so sharply.
"We are currently around 100 basis points below the Fed's neutral estimate," US Treasury Secretary Tom Porcelli said Friday.
"In other words, at this rate of migration, we will not come to neutrality until the end of next year – not over it – where damage occurs, right, will they go beyond that – it seems very likely." "
The target range for the key interest rate is now 2 percent to 2.25 percent. Market bets point to a further 25 bp increase in December.
Forecasts by the US Federal Reserve provide for at least three further increases by 25 basis points in 2019. It will be 3.1 percent next year and 3.4 percent in 2020.
In a blog post late last week, PIMCO market strategist Tony Crescenzi said the neutral rate is "an anchor and no floor or ceiling".
And with interest rates now being met by policymakers' predictions, Crescenzi said, "For US Treasury yields to move significantly from current levels, investors would expect either higher or lower bullion rates."
& # 39; Moving Target & # 39;
The US 10-year US Treasury yield was 3.16 percent in New York on Friday after rising 19 basis points last month and 89 basis points last year. Since August 2016, it has more than doubled.
The rise in US bond yields in recent weeks – the 10-year rate rose to 3.26 percent on Wednesday – and last week's stock sell-off was partially attributed to a shift in investor expectations regarding the Fed's further development and whether it will accelerate the pace of migration, despite the "locomotive" characterization of President Trump.
Mr Porcelli threw cold water on the Fed's argument, arguing that Friday or Thursday nothing new was known about the Fed and its intentions. "Most recently, we've verified that the Fed's stats have changed marginally lately, so has the market just been aware of the reality that the Fed will do what they say about the migration cycle? In fact, we seriously doubt it that this is the case happens here. "
Recession: an event in 2020?
In an interview with CNBC on Friday, the head of the Chicago Fed, Charles Evans, agreed that a neutral position could be achieved with three further increases of 25 basis points. Then the Fed could raise rates further until they become restrictive.
Mr Evans defined restrictively, as he said, that he had previously "above 50 basis points" above the neutral level.
"Now you have to remember that there is a lot of uncertainty about neutrality," said Mr. Evans. "We have different opinions about what that is."
Mr. Evans also said, "We need to feel a little bit of it somehow, but I'll see how inflation develops and the dynamics of the economy."
Porcelli said the Fed is tending to raise interest rates "above" neutral by 100 basis points. At this time, a recession usually occurs. Based on the dot plot of the Fed, that would be an event for 2020.
& # 39; Not emotional enough & # 39;
But here's the problem, said the RBC economist, trend rates of growth, really the most important input that helps to define a neutral, are on the rise. "And the bipartisan CBO has also flagged potential growth for years to come, so guess what's likely to happen and the neutral rate will rise as well."
This week, investors will analyze the minutes of the September September meeting of the Fed, leaving out the word "accommodative" from their description of monetary policy. Maybe the minutes will give a reason to tap into some emotion.