Fed Delivers, Market Yawns

The Federal Reserve did what it was widely to do.  The fed funds target range was lifted 25 bp to 2.00-2.25%.  Three-quarters of Fed officials anticipate a hike in December.  The market had discounted around an 80% chance.  The Fed sticks with the three rate hikes in 2019 and one in 2020.  The year-end rate in 2021 is the same as in 2020.  The Fed is signaling that it does not expect the fed funds target to move above 3.25%-3.50%.  

The Federal Reserve did two other things than many had expected.  First, it lifted its long-term fed funds target range to 3.0% from just below 2.90%.  In recent years, the Fed has been pushing it lower as officials adjust their expectations for what some have dubbed the “new normal.” In actuality, it seems a lot like the Great Moderation of longer business cycles with lower amplitude.  

Secondly, the Fed dropped its description of monetary policy being “accommodative.”  This is a signal to investors that the monetary policy is entering a new phase, though Chairman Powell was clear that it does not signal a change in the monetary path.   There will be a temptation to consider current conditions as neutral, but it may be like a ball bouncing off a wall–for the briefest of moments it stops (neutral) as it changes directions.  The Fed funds target is still below headline CPI (2.7%), which is to say that the real rate is still negative.  The real yield of the two-year note is now slightly positive.  

The Fed’s statement itself was succinct.  The economic assessment was upbeat, and the economy is expected to expand by 3.1% this year.   The Fed, as a whole, does not seem to accept the White House claim that tax cuts, spending increases, and deregulation will change the structural path of the economy.  It forecasts growth to slow to 2.5% next year, 2.0% in 2020 and 1.8% in 2021, which is seen by many economists as the post-crisis trend.  

The market had largely anticipated what the Fed would do and say today and its response was subdued. The dollar firmed but against the European currencies remained within its well-worn recent ranges.  Against the yen, the greenback continued to hover around JPY113.00.   The Antipodean currencies remained firm, while the Canadian dollar slipped, perhaps on NAFTA tensions.  The two-year and 10-year yields remained slightly softer on the day.  The S&P 500 extended its gains and closed the gap left from Monday’s lower opening.  


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