UBS Sees Two Fed Hikes, Asian Central Banks to Pause in 2019

UBS Global Wealth Management predicts the Federal Reserve will raise interest rates twice this year despite markets pricing in little chance of that happening.

An expanding U.S. economy and low recession risk may provide opportunities for the Fed to keep ratcheting up borrowing costs, said Min Lan Tan, head of the chief investment office for Asia Pacific in Singapore. Still, that’s unlikely to spur many Asian central banks to adopt a similar pace of tightening, after policy makers from Indonesia to India boosted rates last year to combat routs sparked by four Fed hikes, rising Treasury yields and a stronger dollar.

“Global inflation will remain low enough for policy tightening to remain gradual, so the Fed could hike twice,” Tan said at a conference Monday. “And in this context, actually, most of Asia policy tightening is done — in fact, China is in easing mode.”

UBS isn’t the only firm to say markets may be too aggressive in dismissing the likelihood of any hikes from the Fed this year. JPMorgan Chase & Co (NYSE:JPM). and Bank of America Corp (NYSE:BAC). still see two increases, while Loomis Sayles & Co. says the U.S. central bank may tighten monetary policy once.

Although the median projection of Fed officials is for two quarter-point increases in 2019, fed fund futures currently don’t even price in one. Fed Chairman Jerome Powell signaled last week the U.S. central bank can be patient before adjusting rates again as it waits to see how global risks impact the domestic economy.

While monetary policy may have stabilized in Asia, UBS still sees “key uncertainties” brewing in the region — regional elections and the U.S.-China trade war to name a few, Tan said.

“Our base case is that sufficient progress will be made to delay further tariff escalation, but substantive issues will remain,” she said./

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