Are Fed Rate Hikes Still On The Table For 2019?

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On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Rob Cittadini, director, Americas institutional, discussed the recent downtick in business confidence, the likelihood of a pause in interest-rate increases by the U.S. Federal Reserve (the Fed) and the impact of last quarter's market volatility on portfolio positioning.

Slowing global growth, U.S.-China trade war weighing on businesses

Sagging business confidence has made headlines on a global scale recently, Eitelman said, including recently published results from the National Federation of Independent Business, which showed decreasing optimism among small business owners in the U.S. Why? "Corporations appear to be worried about two issues in particular: weakening global growth and the ongoing trade war between the U.S. and China," Eitelman stated.

In particular, the downturn in the Chinese economy has led to heightened worries among businesses, Eitelman noted. On top of this, uncertainties surrounding the U.S.-China trade impasse are also impacting the overall business climate, he said. "This really underscores, in our view, the need for both countries to reach an agreement on trade by March 1," Eitelman said, noting that if this doesn't happen, additional tariffs could be imposed. In a bit of good news, he said that talks between the U.S. and China the week of Jan. 7 appeared to be constructive, with the U.S. indicating more of a willingness to strike a new deal. A continuation in positive news on the trade-war front would likely give business confidence a boost, Eitelman remarked.

Powell indicates pause in rate-hikes--but for how long?

Shifting to monetary policy, Eitelman said that recent remarks by Fed Chairman Jerome Powell indicate that the central bank is likely to pause its quarterly rate-hiking cycle--perhaps through the first half of 2019. Why? "The Fed is likely reacting to two things: The slip in business confidence / softening in manufacturing--and the recent market selloff," Eitelman said, explaining that December's market drop may have shown that there was more downside risk to the Fed's economic outlook than previously thought.

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