Carolyn Kaster/AP
Jerome Powell
- BNP Paribas cites firmer growth and inflation prospects as the basis for revising their call for Federal Reserve rate hikes.
- The bank's chief economist, Paul Mortimer-Lee, now expects the Fed to raise rates four times this year, up from three previously, and to tighten once further in 2019.
- "We have revised up our 2018 growth forecasts for both the US and the eurozone," Mortimer-Lee writes in a research note.
The US economy may strengthen more quickly than previously anticipated, according to BNP Paribas Chief Economist Paul Mortimer-Lee, allowing the Federal Reserve to raise interest rates four times in 2018.
In a research note that included upgrades to his growth and inflation forecasts, Mortimer-Lee also said he was revising his Fed call to include one more hike in 2018 than the central bank is currently projecting.
The shift reflects a deeper rethinking about near-term US growth prospects, which Mortimer-Lee said are only partially tied to the recent tax cuts.
"We have revised up our 2018 growth forecasts for both the US and the eurozone on the back of recent Q4 GDP prints and the momentum going into Q1 2018," Mortimer-Lee wrote in his monthly outlook.
US gross domestic product was lower than expected at 2.6% in the first quarter. But Mortimer-Lee said the report's details were "much better than the overall total, with domestic demand very strong and inventories and net trade making a big subtraction."
In addition, "there was a marked strengthening of investment. This not only points to stronger demand today but also says that firms are becoming increasingly confident about the future. Tax cuts will have helped, but the revival in investment intentions is clear in a variety of recent regional Fed surveys."
Corporate investment in equipment has surged at double-digit rates in the last two quarters, he said.
BNP Paribas
"With tax cuts still to be felt, consumer demand - already robust on the back of a declining savings ratio and increased credit card borrowing - looks set to be fair. Government spending, especially on defence (which has picked up recently) and disaster relief, looks like adding to demand more than we had previously expected," Mortimer-Lee wrote.
"Higher oil prices are likely to boost drilling investment; in the downturn, this had big spill-overs into manufacturing, so this is likely again."
This strength will allow the Federal Reserve to be more forceful in tightening monetary policy than officials recently projected at their December meeting, where median estimates pointed to just three rate increases in 2018, according to Mortimer-Lee.
"We now expect the Fed to hike rates four times in 2018," Mortimer-Lee said. BNP Paribas now sees the economy expanding by 3.3% this year, up from a December estimate of 3%.
"In terms of US inflation, recent monthly prints have shown firmer numbers in several areas, including shelter and automobiles. We increasingly believe that the very weak month-on-month prints we saw in core inflation last spring will not be repeated, a view reinforced by signs of a rising rate of inflation," Mortimer-Lee said.
In addition, Mortimer-Lee now sees the Fed tightening one more time in 2019, "where we previously had none. This would leave the fed funds rate peaking at 2.5-2.75% next year."
Andy Kiersz/Business Insider