2018 economic growth to hold steady, despite rising interest rates

Economists predict two more rate hikes

Fannie Maes newest report from its Economic & Strategic Research Group indicates that this year’s economic outlook isn’t going to change much.

Fannie’s Economic and Housing Outlook shows that 2018’s growth remains unchanged at 2.7% and the year will see two more rate hikes from the Federal Reserve.

But things don’t look quite as rosy for 2019. Next year’s economic growth was downgraded to 2.3% growth, due to the expectation of fading fiscal stimulus from last year’s Tax Cuts and Jobs Act, as well as a tightening labor market, Fannie Mae said.

From the report:

“We expect a pickup in growth during the rest of the year based on last December’s Tax Cuts and Jobs Act and this February’s Bipartisan Budget Act of 2018, which should boost consumer spending, business investment, and government outlays.”

“We remain confident that, despite a first quarter hiccup, economic growth will pick up through the rest of 2018. There are signs that consumer spending is poised to strengthen in the months ahead, and we believe recent fiscal policy actions are likely to contribute to growth this year,” said Fannie Mae Chief Economist Doug Duncan.

Duncan also explained that it’s expected that the boost from those recent fiscal policy actions will diminish.

“Come 2019, however, we expect the fiscal boost to fade, and we adjusted our forecast lower accordingly. We also note mounting downside risks to our projections, including growth-constraining protectionist trade policies and rising oil prices, among others. Meanwhile, housing’s upward grind should continue, despite a lackluster first quarter. We expect home sales to post modest gains both this year and next, as prices rise and affordability declines amid low for-sale inventory.”

Fannie Mae also cautioned that rising oil prices pose a risk to the economic outlook, saying the increasing prices could “induce a more aggressive monetary tightening timeline from the Federal Reserve.” But for now, Fannie Mae’s ESR Group continues to project two more interest rates hikes in 2018, including one next month.

“Rising oil prices pose a downside risk to the economic outlook, as they may negate some of the increase in disposable income from the recent tax cuts while also putting upward pressure on headline inflation,” the report said.

A new report from Capital Economics cautions that rising rates will “become an increasing headwind for the economy, especially next year when the boost from fiscal stimulus fades.”

Economists from CE explained in a note that the level of interest rates is low by historical standards but that the change has been more worrying.

“In real terms, the 2-year Treasury yield has risen by 150bp over the past three years. That is similar to the increases seen prior to the past five recessions," the note said.

Speaking of rate hikes, a new note from Stifel Chief Economist Lindsey Piegza offers insight on the increasing Treasury yield, which recently broke 3.1%, its highest level since July 2011.

Piegza says that “Some analysts suggest the additional rise comes as “upbeat” economic data convinces market participants of an upcoming rate hike.” But she notes that “upbeat” is a “generous description” of the recent data, particularly on the consumer front.

She writes, "…this is often what happens when market psychology shifts to the notion of nowhere to go but up. Instead of throwing the baby out with the bathwater as investors tend to do when things begin to turn sour, at this point, investors appear to be drinking the bathwater, convinced it is a bottle of Château Lafite Rothschild."


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