Weekly Financial Update December 24, 2018
When Doves Cry
The Fed meeting has come and gone. The Fed moved in a more dovish direction, it offered a degree of flexibility, but not as much as investors had hoped for.
The Federal Reserve hiked the fed funds rate by 0.25 percentage point to a range of 2.25 – 2.50% on Wednesday (Figure 1). The rate hike was not a surprise. The focus was going to be on how the central bank would frame the increase and its outlook going forward.
Last date: Dec 2018 fed funds rate; Nov 2018 unemployment rate; Nov 2018 Inflation: core PCE Price Index Fed funds rate represents midpoint of 0.25 percentage-point range
Let’s look at what the market wanted and what the Fed provided (taken from the Fed’s statement; press conference, Fed economic projections contained on the Federal Reserve website).
1. The market wanted the Fed to project no rate hikes or one rate hike next year. It received projections for two hikes, down from the forecast of three in September.
2. The market was for looking less rigidity in the statement. Since the beginning of the year, the Fed has said it expects “further gradual” rate hikes.
Investors wanted the statement removed. Instead, the Fed adjusted the language to “some further gradual” rate hikes. It leaves the impression there is less wiggle room and less flexibility to adjust policy next year.
3. The market wanted the Fed to explicitly acknowledge economic growth has moderated; more emphasis on pain in interest-rate sensitive sectors of the economy such as housing.
Instead, the Fed said growth has been strong, but noted it was monitoring developments and acknowledged emerging “crosscurrents.”
4. This is a more complex issue, but the market wanted flexibility on the Fed’s balance sheet. The Fed is currently allowing bonds to roll off at a rate of $50 billion per month.
Instead, the Fed held firm on plans to shrink the balance sheet that expanded early in the decade when it was buying bonds.
It’s not the Fed was tone deaf. It is moving incrementally in a more dovish direction.
Mostly overlooked in the press conference was this comment by Powell. “We're going to be letting the data speak to us and form the outlook … of what would be appropriate policy. So, there's a fairly high degree of uncertainty about both the path and the ultimate destination of any (my emphasis) further increases.”
We’ve had nine rate hikes since the cycle began. Current projections suggest two more increases next year. And that’s not set in stone. The Fed suggested it is close ending the cycle of rate hikes, but it didn’t stress it strongly enough. And investors expressed their displeasure in the wake of the decision.
If you have any questions or concerns, feel free to reach out to me. That is what I’m here for.
Christmas time Christmas is here. As a child, I always looked forward to the Christmas shows that would appear on TV during the holidays. I still have a warm spot for Charlie Brown. It’s a timeless cartoon that is still relevant. Today, It’s a Wonderful Life tugs at my heart. As Christmas nears, let me take a moment to wish you and your family a very Merry Christmas!