Fed Meeting Takeaways: Rate Projections and the “Accommodative” Removal

The Federal Reserve (Fed) wrapped up its most recent monetary policy meeting yesterday by announcing a rate increase – an outcome the markets largely expected. In our view, the Fed’s updated rate projections and an important change in its policy statement were the more interesting takeaways.

Policy rate projections are provided through a “dot plot,” a compilation of the Fed Board of Governors members’ and Fed bank presidents’ projected level of rates, with each estimate represented by an unlabeled dot. As shown in the LPL Chart of the Day, the Fed’s new dots show projections of one more rate hike this year and three rate hikes in 2019.

Fed's Latest Dots Project Four More Rate Hikes Before End of 2019

While Fed Chair Jerome Powell reiterated several times in Wednesday’s press conference that the Fed will move forward with gradual rate hikes, the dot plot implies that policymakers expect the pace of hikes to slow. The dots also show that members expect the fed funds rate to peak at 3.38% at the end of 2020 before declining into a “longer-term” rate of 3%.

“The Fed’s updated rate projections support a gradual path of interest rate increases,” said LPL Chief Investment Strategist John Lynch. “We believe this approach is appropriate and limits the possibility of a policy mistake.”

The Fed also removed the word “accommodative” from its description of its monetary policy in Wednesday’s statement, another signal that rates may be approaching a neutral level. However, Powell noted in the press conference the change doesn’t signal a shift in the path of monetary policy. Instead, he said, it reflects that policy is moving in line with the Fed’s expectations.

This change in language reflects the Fed’s positive outlook for economic growth, but Powell’s comments qualify the meaning of this change by acknowledging that it reflects the appropriateness of current policy. The Fed continues to evaluate the upsides and downsides of the macroeconomic environment, and right now, it doesn’t see any reason to change its policy approach.

For more takeaways from the Fed meeting, check out next week’s Weekly Economic Commentary.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not bank/credit union obligations and are not endorsed, recommended or guaranteed by any bank/credit union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA/SIPC

For Public Use — Tracking # 1- 775779 (Exp. 05/19)