Key points

  • The US Federal Reserve closed 2018 with its fourth interest rate hike of the year. However, its rhetoric wasn’t exactly dovish, leading many to believe tightening will continue
  • Despite further disappointing macro data, in line with our below-consensus forecasts, the European Central Bank expressed “continuing confidence”
  • The European political backdrop remains dramatic – from Brexit to the Italian budget saga and France’s “yellow vests”. But compromises are still possible
  • Japanese growth may rebound only modestly as net trade keeps weighing on the outlook
  • China’s macro news flow has disappointed but the Central Economic Work Conference confirmed more accommodative policies for 2019
  • Similarly, indicators in other emerging markets pointed to a potential further economic slowdown ahead

The Fed tried and failed to deliver a dovish hike

As markets, and we expected, the US Federal Reserve (Fed) increased the Fed Funds Rate by 0.25%, to a range between 2.25% and 2.5% on 19 December. A unanimous Federal Open Market Committee vote came in line with expectations, despite financial market weakness in the previous weeks (Error! Reference source not found.). In the accompanying statement, the Fed acknowledged the material tightening in financial conditions since its November meeting but maintained that “some” further gradual increases would likely be warranted. Similarly, the Summary of Economic Projections acknowledged a softer outlook, with lower GDP growth and inflation forecasts. And the “dots” also moved lower with the median estimate now consistent with the Fed hiking rates twice in 2019 and once more in 2020 (to 3%-3.25%).


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