Ready, Set, Hike - September 26, 2018

The Federal Reserve’s two-day meeting concludes on Wednesday. It’s widely expected central bankers will hike the fed funds rate 0.25 percentage points to 2.00-2.25%.

  • Most investors anticipate a December rate hike, or four this year.

  • At 2.00-2.25%, rates would remain near historically low levels.

As rates rise, the fed funds rate is approaching what’s called the “neutral rate.”

  • It’s a level that neither stimulates economic growth (lower encourages borrowing and spending),

  • or restricts economic growth (higher discourages borrowing and spending).

Most Fed officials suggest 2.75-3.00% is neutral per projections issued in June.

Threading the needle—

Raise rates too slowly and the economy could overheat and drive inflation higher. Raise rates too quickly and economic growth could stall.

  • It’s a delicate balancing act.

Investor’s Corner

Shorter-term investors will be looking for new hints about rates next year. At the June meeting, the Fed projected three 0.25 percentage point hikes in 2019.

  • Commentary from the Fed has the potential to move markets in either direction over the short term.

Longer term, seven rate hikes in this cycle have failed to prevent new highs for stocks.

Rate hikes have been in response to faster economic growth, which support profits. Rate hikes have not been triggered by unwanted inflation.