(Wednesday, Post-Fed Decision) The Federal Reserve looks like it has become remarkably proficient at tipping off the market ahead of its Decision Day and today’s step up in interest rates to a range of 1.5% to 1.75% helped buttress that.
Jerome Powell’s first meeting as head of the Federal Reserve Board and its Federal Open Market Committee (FOMC) today was marked by some notable changes to the statement and a fresh outlook on future unemployment, according to the statement.
Despite the snow in Washington, D.C., which clouded visibility, the Fed attempted to make clear that the economy was still running well and that continued strength in the labor market could continue to keep rates rising on a “gradual” pace. That likely was not a surprise to Fed rate watchers. What might have been, however, was that while the committee is keeping its plan to raise rates three times this year it expects to raise them three times next year instead of two.
There were small changes in the language of the statement, most notably that “economic activity has been rising at a moderate pace,” rather than stronger, as noted in its December missive. “Household and business fixed investment have moderated from their strong fourth-quarter reading,” the statement said.
It also noted that the “economic outlook has strengthened in recent months,” adding that “economic activity will expand at a moderate pace in the medium term.”
Ahead of the forecast the CME FedWatch Tool, which uses Fed fund futures prices to gauge the probability of an upcoming rate hike, stood at 97.2%. After the announcement, the likelihood of at least one rate hike by June edged up to 80.8% from 77.7% ahead of the decision. The two-day June meeting is scheduled to begin June 12, with a rate hike decision on the books for June 13 and the press conference slated to follow. The Federal funds rate is what banks charge each other on overnight loans, and is the basis for many consumer loans ranging from mortgages to credit cards.
What else didn’t change much in the closely-watched wording of the Fed statement was that that “Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,” the statement said. Remember that the FOMC added that “measures of inflation have increased in recent months,” in December, which had some analysts fearful that it was a signal that more than three rate hikes could be on the table this year.
At the press conference, Powell noted that only gradual increases in prices are evident at a time when unemployment has been falling, adding that the FOMC’s economic projections reflected that thinking. The Fed, he said, wants to stick to the “middle ground” of monetary policy. “We only made one decision today; to raise...rates,” he said.
He also appeared to take umbrage at suggestions from the press that the Fed has “tolerated” or “allowed” inflation to hover below 2%, something Wall Street analysts have been bantering about in recent days.
"I wouldn’t characterize what we’ve done over the past five years as 'tolerating,' too-low inflation, he said. “We were always pushing toward 2%.” He added that “unusual price declines” in recent months have kept inflation lower, but he expects those to change, leading inflation to reach 2% next year and 2.1% by 2020. But, he added, “various forces will continue to affect” those forecasts.
Analysts said they were looking for some direction on how aggressive the Fed might be in raising interest rates this year. Powell said the FOMC expects rates to stand at 2.1% by the end of the year, 2.9% by 2019’s finish, and 3.4% in 2020. “That’s three years in the future...we don’t have the ability to see that far into the future, so I wouldn’t put a lot into that,” he added at the press conference.
Again left unchanged was that the Fed continues to believe that “economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” Powell added at the press conference that the FOMC will continue to use interest rates as a means of guiding monetary policy.
The three major benchmarks were pretty muted in the early going today, which is not unusual as investors await direction from the Fed. As the morning moved into afternoon, what traders call a “Fed drift” looked like it was starting to settle in. Analysts’ analysis of prior Fed decision days have long seen a typical move higher on the Dow Jones Industrials ($DJI) of about 60 points, which was roughly evident in the hour ahead of the rate announcement.
After the new rates were aired, the Dow jumped as much as 200 points but lost much of that momentum once Powell began speaking to the press. Much the same jump/pullback action was happening on the S&P 500 (SPX), which was up modestly during the press conference, while the Nasdaq Composite (COMP) just barely sat in positive territory. By the market close, though, the three major stock indices had drifted into negative territory.
Meanwhile, yields on Treasury notes have been moving higher this week and the 10-year rate reached as high as 2.92% before retreating to 2.89%.
The Dot Plot: Analysts talked a lot about dots ahead of the Fed decision, apparently anxious to see what direction the Fed might take this year. The dot plot is part of the FOMC’s Summary of Economic Projections, and measures—yes, with dots—where each member anticipates where Fed funds rates will be at the end of the year and beyond. Many analysts said they believe the dot plot provides important insight into how many more hikes might be ahead.
And the Vote Count: Chair Jerome Powell took center stage today and it looked like his voting members followed his lead. The vote was unanimous with William Dudley, vice chairman; Thomas Barkin; Raphael Bostic; Lael Brainard; Loretta Mester; Randal Quarles; and John Williams all voting with Powell.
All the Best,
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