The sale on the market will not change the course of the Federal Reserve at higher interest rates

The Federal Reserve, and most market strategists, see little reason for last week's equity sale to alter the gradual lifting of US interest rates.

Fed policymakers have always and more distinctly, in an increasingly singular voice, explained that rates would continue to rise over the next year and, given the strength of the US economy it is likely that rates will become at least modestly restrictive.

What is not clear yet is how much rates will need to rise to a level that the Fed believes is neutral – where rates do not strengthen or slow down the pace of the Fed. growth – because rates have already gone up a lot.

"At the present time, we are about 100 basis points below the Fed's neutrality estimate," said Friday the US chief economist Tom Porcelli, RBC Capital Markets.

"In other words, at this rate of growth, we will not be able to return to neutral until almost the end of next year. Not above that – where the damage tends to happen. Will they go there? Will they go beyond it? "

Publicity

The target range for the federal funds rate is now between 2% and 2.25%. Market bets indicate another 25 basis point increase in December.

The Fed's policymaker projections project at least three more incremental increases of 25 basis points in 2019, to reach 3.1% next year and 3.4% in 2020.

In an article published on a blog late last week, market strategist Tony Crescenzi told PIMCO that the neutral rate was "an anchor, not a floor or a ceiling".

Mr Crescenzi said that "in order for Treasury yields to move significantly away from current levels, investors should expect a higher or lower final rate," said Mr Crescenzi.

& # 39; Moving Target & # 39;

The 10-year US yield was 3.16% at the end of trading on Friday in New York, after rising 19 basis points last month and 89 basis points over the past year. It has more than doubled since August 2016.

The rise in US bond yields in recent weeks – the 10-year rise of 3.26% on Wednesday – and the sale of shares last week were attributed in part to a shift in investors' expectations regarding The future of the Fed lift and whether it will accelerate the pace of increases despite the "loco" of President Donald Trump.

Mr Porcelli threw cold water on the Fed's excessive tightening thesis, saying nothing new was learned on Friday or Thursday about the Fed and its intentions. "The last time we checked, the Fed's points have changed slightly – has the market just realized that the Fed is going to do what it says with regard to the upside cycle? we seriously doubt that this is happening here. "

Recession: a 2020 event?

In an interview with CNBC on Friday, Charles Evans, director of the Chicago Fed, agreed that a neutral could be reached with three further increases of 25 basis points, then that the Fed could continue to raise rates until then. That they become restrictive.

Mr. Evans defined as restrictive, as he said earlier, "maybe 50 basis points" above the neutral position.

"Now you have to remember that there is a lot of uncertainty about neutrality," Evans said. "We have different opinions about what it is."

Mr. Evans also said: "We may have to take a little bit of it, but I will look closely at the evolution of inflation and the dynamics of the economy."

Mr Porcelli said the Fed has tended to raise rates by about 100 basis points "above" the neutral position. It's usually at this moment that the recession occurs. Based on the Fed's point chart, it would be an event for 2020.

"Not emotional enough"

But here's the problem, said the RBC economist, namely, that trend growth rates, really the key inputs for defining neutrality, are on the rise. "And the non-partisan CBO has also marked potential growth for years to come, so guess what will probably happen?" The neutral rate will also increase. "

This week, investors will analyze the minutes of the Fed's monetary policy meeting in September, removing the word "accommodative" from its description of monetary policy. Maybe the minutes will provide a reason to tap into certain emotions.