Federal Reserve

The Fed is ‘constrained by the rest of the world’: HSBC economist

Inflation to spike in most markets in early 2017: HSBC
Inflation to spike in most markets in early 2017: HSBC

The Federal Reserve surprised markets this month by forecasting three interest rates during 2017; yet according to one economist, it's likely that the central bank will be "constrained" when it comes to raising rates.

"We're sort of, of the view that the Fed is constrained by not just its own inflation outlook, it's constrained by wage growth but it's also constrained by the rest of the world," James Pomeroy, global economist at HSBC, told CNBC on Thursday.

"And actually if you're in a world where as the Fed sort of continues to raise rates that you get a stronger dollar, that sort of hurts the emerging world, and actually that's a situation that will constrain what the Fed is able to do," he added.

As one of the world's most-watched central banks, the Fed has to take into account a number of factors that could affect the U.S. economy. At the start of 2016, several market watchers predicted that the Fed would raise rates three times over the course of this year; however the central bank only ended up hiking once.

This year has been a turbulent year, with Brexit, the U.S. election and geopolitics all having an impact on how financial markets perform.

As a result, the Fed has had to be alert to possible economic shocks. In June, the Fed held off raising rates a week before the U.K. voted to leave the European Union, with the central bank saying Brexit was a factor in the decision, as it could have consequences for the U.S.' economic outlook.

With 2017 around the corner, uncertainty still lingers in many areas. Monetary policy decisions by leading central banks could shake up market sentiment, while China's growth story, election outcomes and what happens with the U.K.'s Brexit negotiations are also set to cause a stir.

The question of what lies ahead for the U.S. remains key too, for the world is still waiting to see what a Donald Trump administration will mean for the country's economy and whether the President Elect will deliver on tax cuts, spending and deregulation.

With all these factors and continued uncertainty still at play, HSBC only expects the Fed to raise rates twice in 2017, with Pomeroy adding that 2018 could get "even harder" for the Fed.

"If you've got the Fed, who've (hypothetically) raised another two times and then you've got the European Central Bank still sort of just finished its QE programme, you've got the Bank of Japan still doing whatever they're doing, it becomes very, very hard for the Fed to do even more."

Despite the uncertainty that lies ahead, the Federal Reserve expects to raise rates two or three times in 2018 and three times in 2019.

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