Year of the Rooster: The Fed gets hiking

A year ago, AsianInvestor revealed its 10 predictions for the year. At a time of a new US president and a generally positive US economy, attention had begun turning to the potential for higher inflation and the attitude that the Federal Reserve would take in response. 

This led to last year's second question: 

How many rate hikes will the US make this year?

Answer: Two

There was a lot of focus on whether the Federal Reserve would begin to ratchet up interest rates more aggressively from their ultra-low levels of the previous few years, even as it looked to ease back on its quantitative (bond-buying) stimulus. 

Views across the market were slightly mixed about how many interest rate hikes were likely; the only general agreement was that some would be forthcoming. We decided that the year would see another two quarter percentage point hikes. 

Ultimately we were one out. The Fed increased rates by 25 basis points in March 2017, then did so again in June, and finally once more in December. These increases, which were the fourth, fifth and sixth increases since the global financial crisis of 2008, were seen to be in response to the economy's accelerating growth and increasing confidence, along with concerns that inflation could begin to rise. 

There were also concerns among some economists about the grandiose promises made by US President Donald Trump on the campaign trail, including a $1 trillion infrastructure investment plan and tax cuts that would together increase borrowing and stimulate demand, but to a level that potentially proved inflationary. 

However, t he economists we spoke to felt that Trump would be unlikely to sway spending so much that it caused runaway price increases.  

That belief turned out to be largely accurate but Trump's determination to cut regulations and enact a major tax cut for companies and individuals did feed through to a generally positive market.

While overall job growth slowed somewhat, from 183,000 a month on average in 2016 to 166,000 a month last year, the country's unemployment rate ended the year at around 4.1%, even as the economy grew at a healthy 2.3% for 2017 as a whole. 

At the same time there were few signs that inflation was running too hot. Throughout the year the US inflation rate remained around or slightly below 2%, a level that had the Fed's board a little concerned. Ultimately consumer price inflation was 2.1% for the entirety of 2017, according to the US Labor Department, which helped ensure the Fed was not more aggressive in its rate hiking as the good times continued to roll.

It looks set to continue doing so this year too. Most economists predict the Fed will increase rates by another three rounds in 2018; some, such as Goldman Sachs, think there could even be four. 

Last year's investment experts had argued that gradual rates hikes would make defensive equity stocks such as real estate investment trusts and high-yield bonds more appealing. But both these sectors proved poor relative investment choices and underperformed the wider stock market, which skyrocketed in 2017.

While the FTSE NAREIT All U.S. REITs Index returned 9.27% for the year, and the BofA Merrill Lynch US High Yield Total Return Index Value offered a 7.4% total return, the S&P 500 enjoyed a 21.7% return. It was not a year to be too defensive, or focused on fixed income. 

Previous Year of the Rooster reviews: 

Will Donald Trump start a trade war with China?