The Fed Raised Rates; Tell Me Something I Didn’t Already Know

The Federal Reserve (Fed) raised the fed funds target rate 25 basis points (0.25%) to a range of 1.75-2.00%, but that wasn’t news since the market knew it was coming; nor was the increase in median dot plot, which now suggests members expect four hikes total in 2018 instead of three. So what wasn’t expected?

In his post-meeting press conference, Fed Chair Powell stated that a press conference will be held after every policy meeting starting in January 2019 in an effort to provide greater transparency— currently the conferences are held after every other meeting. Regarding the recently passed tax reform, Powell noted that committee members generally believe fiscal changes will provide meaningful, significant support to demand for the next three years, but that the amounts and timing may be more uncertain. The remarks suggest economic growth should be sustained for the foreseeable future, but that the higher demand could be the spark inflation needs to move meaningfully higher.

Another noteworthy takeaway is the Fed’s removal of “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” from its policy statement is also noteworthy. The implications are that it stands ready to be more aggressive should inflation ramp up. As our LPL Chart of the Day shows, the projected longer-run neutral policy rate and the current rate have been converging from both directions. This means that at some point, that convergence will be close enough for the Fed to no longer characterize its policy stance as accommodative. We think the changes to policy language suggests that point is approaching, likely targeting the second half of 2019.

“The Fed was upbeat about the economy, and changes to members’ forecasts and statement language, and the tone of the press conference, indicated to markets that the Fed may now likely hike during its September meeting” noted LPL Chief Investment Strategist John Lynch. Stay tuned to the LPL Research Blog for updates on the Fed and the economy.

 

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