It’s hasn’t been surprising to see the Fed’s projections for rate hikes differ from the futures market in this expansion. The interesting part about the current divergence seen in the chart below is that the Fed could be near the end of the hike cycle.
Source: Pension Partners
The futures market expects 3 more hikes by 2020, with the hikes ending next year. Since the Fed could hike rates 2 more times this year, there’s only one hike left in the cycle next year. The Fed dot plot projects 6 more hikes by 2020 as there is projected to be one hike in 2020.
It’s not impossible for the expansion to continue until 2020 because inflation is modest and growth has been strong lately. The problem lies with the Fed continuing to hikes rates. With the difference between the 10 year yield and the 2 year yield at 25 basis points, it’s unlikely that the Fed will be able to hike rates 6 more times without an inversion. The 10 year yield has had trouble getting above 3% this year, making a 3% Fed funds rate unlikely. Either the Fed or the market will move to match expectations with projections. We think the Fed projections have a better chance of coming down than the market expectations have of moving up.
No Debt Issuances From The Mega Caps
In late 2017, C&I lending growth stalled to near zero. Usually when growth falls, it’s a recession signal. This was curious because economic growth was strong in the second half of 2017 as that was when global synchronized growth was a reality. Some speculated that C&I lending was a lagging indicator and some said lending slowed because profits were expanding so rapidly. The chart below shows an instance where capital was so readily available, borrowing ceased. As you can see, there has been no debt issued by the 10 largest holders of formerly overseas cash which was repatriated because of the tax holiday.
