Daily Commentary BY THE CURVE TEAM –

Rates Rising as Trade War Escalation Looms

17th of September, 2018

With the next Fed meeting just over a week away, the rhetoric around higher interest rates continues to ramp up. It comes as reports suggest that Trumps next trade move is imminent.

Over the past week there has been countless Fed members speaking and the message has been clear, rates are heading higher. The market currently has a hike at next week’s meeting fully priced in with another in December now highly likely.

Chicago Fed President Charles Evans was the latests to give his take, on Friday night saying  “the U.S. economy is firing on all cylinders, with strong growth, low unemployment, and inflation approaching our 2 percent symmetric target on a sustained basis.”

He spoke about the long run outlook for interest rates and the Fed’s current dot plot. He said that “the 3 to 3.5 percent level of the funds rate projected for 2019 and 2020 is mildly restrictive”, before adding that “given an unemployment rate forecast below the natural rate, such a policy stance would be quite normal and consistent with some moderation in growth and a gradual return of employment to its longer-run sustainable level.”

The biggest concern that the Fed has around their outlook is the potential fallout from the US Administrations war on trade. On that front, it is being reported that Trump’s is set to announce his next wave of tariffs on Chinese imports.

It could make for an interesting week ahead of the Fed meeting, especially as China is being reported as having some more direct counter policies should Trump go ahead as expected.

David Flanagan

Director - Interest Rate Markets