UBS Chairman Weber Sees Two More Fed Hikes in 2017

TL;DR

UBS Chairman expects two more Fed rate hikes in 2017.

Transcript

Let me ask you uh if you think Janet Yellen executed the perfect dovish hike yesterday. I think what she executed was a hike that was largely priced in especially over the recent weeks. And what she confirmed was that actually the economy is moving along the trajectory that the Fed had projected all along. They haven't really changed their outlook.... Read More

Key Insights

• Janet Yellen's recent rate hike was anticipated and aligns with the Fed's economic projections, suggesting stability in their outlook.
• The Fed is expected to implement two more rate hikes in 2017, with the possibility of three more in the following year.
• Current inflation increases are largely due to oil price rebounds, not core inflation, allowing the Fed to maintain a gradual approach.
• The Fed considers the exchange rate as a data point rather than a decision variable, focusing primarily on domestic economic performance.
• The US economy's dependence on international trade has increased, making global economic conditions more relevant to Fed decisions.
• The Trump administration's fiscal policies may be more neutral than markets expected, focusing on tax cuts funded by expenditure reduction.
• Significant budget cuts may impact sectors like the environment and agriculture, potentially affecting global commitments like the Paris Agreement.
• The US aims to avoid increasing debt levels, which could reassure markets concerned about high debt-to-GDP ratios.

Questions & Answers

Q: What was the main reason for the recent inflation increase?

The recent increase in inflation was primarily driven by a rebound in oil prices rather than changes in core inflation. This rise is expected to taper off towards the end of the year, as it has already peaked in February and March. The Fed can therefore adopt a gradual approach to future rate hikes.

Q: How does the Fed view exchange rates in their decision-making process?

The Fed considers exchange rates as a data point rather than a decision variable. While they monitor exchange rates, their primary focus is on domestic economic performance. The US economy's increased trade dependence means global conditions are more relevant, but domestic factors remain the primary focus for the Fed.

Q: What are the expectations for future Fed rate hikes?

The Fed is expected to implement two more rate hikes in 2017, with the possibility of three additional hikes in 2018. These expectations align with the Fed's current economic projections, indicating stability in their outlook. The gradual approach is supported by recent inflation trends and economic performance.

Q: How might the Trump administration's fiscal policies impact the economy?

The Trump administration's fiscal policies are expected to be more neutral than initially anticipated, focusing on tax cuts funded by expenditure reductions. This approach avoids increasing the US's debt levels, which could reassure markets concerned about the high debt-to-GDP ratio. Budget cuts may impact sectors like the environment and agriculture.

Q: What sectors might be affected by the Trump administration's budget cuts?

The Trump administration's budget cuts are expected to impact sectors such as the environment and agriculture. These cuts may raise concerns globally, especially in light of commitments like the Paris Agreement. The focus on reducing expenditure rather than issuing debt is intended to finance tax cuts and maintain fiscal responsibility.

Q: How has the US economy's dependence on trade changed?

Over the last decade and a half, the US economy's dependence on trade has increased, with openness moving from 8% to 12%. This change makes global economic conditions more relevant to Fed decisions, although the primary focus remains on domestic economic performance and stability.

Q: What is the significance of the Fed's gradual approach to rate hikes?

The Fed's gradual approach to rate hikes reflects their confidence in the current economic trajectory and the temporary nature of recent inflation increases. By maintaining a steady pace, the Fed aims to support economic growth without causing unnecessary disruptions, ensuring that their projections are justified by the underlying data.

Q: How does the Fed's focus on domestic performance impact their policy decisions?

The Fed's focus on domestic performance means that their policy decisions are primarily influenced by US economic conditions. While global factors are considered, particularly given the increased trade dependence, domestic stability and growth remain the key drivers of their monetary policy, ensuring that rate hikes align with economic projections.

Summary & Key Takeaways

• UBS Chairman Axel Weber discusses the Federal Reserve's interest rate hike, which was largely anticipated and aligns with their economic projections. He expects two more rate hikes in 2017 and possibly three in 2018. The recent inflation increase is attributed to oil prices, allowing for a gradual approach.

• Weber explains that the Fed views exchange rates as a data point rather than a decision variable, focusing on domestic performance. The US economy's growing trade dependence makes global conditions more important to Fed decisions, though domestic factors remain the primary focus.

• Regarding US fiscal policy, Weber notes that the Trump administration's budget is more neutral than expected, with tax cuts funded by expenditure reductions. This approach avoids increasing debt levels, reassuring markets concerned about the US's high debt-to-GDP ratio.