The annual rate of economic growth in the second and third quarters of 2017 was 3%, and business surveys show that the fourth quarter data should be equally strong. Strong domestic economic activity, continuous improvement in the global environment, and optimistic prospects for tax reform mean that it is very possible to achieve 3% economic growth in 2018. Although the inflation rate is below the target, the weakness of the U.S. dollar has pushed up import costs, the tightening of the labor market indicates an upward risk of inflation, and the real estate market has also begun to exert upward influence. Against this background, the Fed is expected to raise interest rates again at its December meeting.
Bank of America Merrill Lynch (Bank of America Merrill Lynch) global economist Ethan Harris said that the Fed's interest rate policy goal is to create a "moderate" tightening of financial conditions.
The Fed hopes that raising the yield curve will have a moderate inhibitory effect on economic growth, so that the economy can continue to grow steadily without overheating.
So far, the Fed’s gradual interest rate hikes have failed to tighten financial conditions. The stock market continues to set new highs, and after the Fed raised interest rates four times, the yield on the 10-year Treasury bond has hardly changed.
Harris pointed out that if the market continues to be "indifferent", it will "encourage" the Fed to raise interest rates more.
New York Fed Chairman William Dudley has repeatedly warned that if financial conditions do not tighten as expected, the Fed will raise interest rates at a faster rate.
Dudley said: "With all other factors being equal, the easing of financial conditions may make the policy interest rate path steeper."
Vincent Reinhart, chief economist at Standish Mellon, said that low inflation will give the Fed a reason to stick to its position. However, he pointed out that the Fed hopes to avoid overheating in the market due to the "foresight" of the financial crisis.
Reinhart said: "They know that the cost of financial excesses is very expensive."
Reinhart pointed out that the current monetary policy is no different from the practice of steadily raising interest rates by 25 basis points each time from 2004 to 2006. The only thing missing is the phrase "measured pace".
What does it mean for the Fed to raise interest rates?
Once the Fed raises interest rates again, the profit-seeking nature of funds will inevitably promote the influx of funds into the United States, which will have some impact on the U.S. dollar, U.S. stocks and domestic inflation.
Under the global low interest rate environment, the long-term expected return level of large-scale assets is relatively low. It is difficult for investors to find investment opportunities with relatively high returns and moderate risks in the market. Therefore, a large amount of funds will turn to find valuation depressions. The continuous rise since November 2016 is due to this. Since the United States is a single rate-increasing economy, funds will flow into the United States, and there will be a considerable amount of funds directly chasing the stock market, resulting in US stocks may still be pushed up even further in the context of high valuations.
Another important effect of raising interest rates is the possibility of re-inflation. The influx of funds will aggravate the already loose liquidity of the United States and superimpose the impact of Trump’s economic stimulus policy. The market will regenerate the expectation that the economic cycle may be prolonged for the United States, which has entered the end of the economic cycle, and this is very likely to lead to Inflation reappeared in the United States and spread to Europe and even Asian countries.