Fed: pause for thought

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The US Federal Reserve may come to regret suggesting that rolling back crisis-era monetary stimulus would be like “watching paint dry”. That’s because the US economy is unlikely to grow quickly enough to justify the degree of tightening it envisages. The Fed could stop hiking interest rates as soon as the first quarter of next year. Since October 2017, when the central bank started running down its securities portfolio, its “twin” tightening has seen the cost of borrowing rise by 100 basis points (bps) and its balance sheet shrink by USD350 billion, which we estimate is equivalent to an additional 35 bps of rate hikes. This has already started to weigh on industries that are traditionally most sensitive to interest rates, including the auto and housing sectors, which together make up a tenth of the US economy. As the drag from tightening gathers strength, the next shoe to drop may be business investment, which is responsible for 15 per cent of economic output.