Five Reasons Why the Fed May Hike Rates More Than Markets Expect

(Bloomberg) -- Investors who don’t see much in the way of Fed interest rate increases this year may be in for a surprise, according to AllianceBernstein LP. Futures pricing suggests the markets anticipate two small rises, says analyst Eric Winograd, but he expects there will be more.

“Several economic and policy factors are converging that could pave the way for four 25-basis-point hikes in 2018,” he wrote in a recent blog post. Winograd gave five reasons to back up his view:

• The economy is performing well, with the most recent quarterly GDP figures showing a 3.2 percent increase on an annualized basis. “A strong economy makes rate hikes more likely, in order to prevent overheating,” he wrote.
• Inflation pressure is growing. While core CPI is still below the Fed’s 2 percent target, many factors holding it down are likely to dissipate, he said. Rising oil prices also point to higher price pressures.

• Financial conditions have eased, making it simpler for households and businesses to obtain funds for consumption or investment. “That’s great for growth, but the Fed is probably starting to worry about too much of a good thing,” Winograd said.
• Policy was tightened thrice in 2017, and “it’s hard to see why the Fed would be even slower to tighten in 2018 than it was last year.”
• Fear of markets overheating. Several FOMC members have expressed concern about possible financial-market excesses and asset-price bubbles, “so pulling the reins in a bit on financial markets makes sense.”

Winograd gives one reason why he may be proved wrong. Conceding there are always risks that could upend the economy and expectations, he said: “Political turmoil in Washington is the biggest wild card.”

To contact the reporter on this story: Colin Simpson in Hong Kong at csimpson42@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar

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