On Wednesday, the Federal Reserve delivered the interest rate hike the markets were expecting. The Fed announced it will be upping the fed funds target rate by 0.25 percent to a range of 2.25-2.50 percent.
“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term,” the Fed said in its statement.
Applying The Brakes?
The Fed also lowered its target projections for future interest rates. The Fed lowered its 2019 fed funds rate projection from 3.1 percent to 2.9 percent and its 2020 and 2021 projections from 3.4 percent to 3.1 percent. The Fed also lowered its 2018 U.S. GDP growth projection from 3.1 percent to 3 percent and its 2019 growth projection from 2.5 percent to 2.3 percent.
Finally, the consensus dot plot projections for 2019 suggest two more rate hikes next year, down from three rate hikes projected back in September.
Interest rates are already at their highest level of the past decade.
RSM US LLP chief economist Joe Brusuelas said investors likely didn’t get what they were hoping for from the Fed.
“The statement and the summary of economic projections were not as dovish as many market participants desired, which from our vantage point does suggest that the Fed will hike rates as many as twice in 2019,” Brusuelas said following the Fed’s decision. “Thus, investors or policymakers who are concluding that it’s one and done for the Fed are likely to be disappointed in the year ahead.”
Brusuelas said a subtle shift in language could provide a hint about the Fed’s 2019 plan.
“The committee added the word 'some' to the phrase 'further gradual increases' which implies the Fed could pause for a variety of risks to the economic outlook in 2019,” he said.
Bankrate.com chief financial analyst Greg McBride said investors may not see another rate hike for quite some time.
“The Fed downshifted their projections of 2019 economic growth, inflation, and interest rate hikes – not in a big way but enough to remove the urgency of repeated rate hikes,” McBride said.
“Interest rate hikes produce turbulence for the stock market but do result in better returns for savers and investors looking for a safe haven.”
Rising interest rates are generally bad for stock prices, and the SPDR S&P 500 ETF Trust (NYSE: SPY) and the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) both turned negative following the announcement. The SPDR Gold Trust (NYSE: GLD) was also down Wednesday.
The market expects the Fed to hit pause on its tightening in 2019. According to CME Group, the fed fund futures market is pricing in 56.6 percent chance the fed funds rate will be at or below its current level by the December 2019 Fed meeting.
Photo credit: Dan Smith - Own work via Wikimedia Commons
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