The Fed’s eight rate-hike since 2015 was perhaps the most anticipated yet, and Jay Powell did not let investors down, delivering the 25bps hike everyone expected.
And so it was – but all eyes were on the dot plots and the language changes in the statement. As Bloomberg noted, Fed policy makers face two important decisions at their September meeting: One, whether to retain optionality around a potential fourth interest-rate increase in December; and, two, the appropriate policy trajectory as rates approach neutral.
Here are the Key Takeaways from the Fed report:
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Only meaningful change in FOMC’s statement is removal of the sentence on maintaining “accommodative” policy.
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The overview of the economy is same as August statement: labor market continues to strengthen, activity “strong.’
New forecasts:
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Fed sees 2018 economic growth at 3.1%, a noticeable upgrade from the 2.8% it saw in June, without any expected breakout in inflation.
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Long-run growth outlook sees economy settled back to 1.8% GDP expansion in 2021.
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Median estimate of long-run neutral rate ticks up to 3% from 2.9% in June
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*FED DOTS SHOW 12 OF 16 OFFICIALS FAVOR FOUR RATE HIKES IN 2018
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*FED MEDIAN ESTIMATE STILL SHOWS THREE RATE HIKES IN 2019
The shift from June to September:
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Full Redline below:
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For some context of just how easy financial conditions are (or put another way, just how much room The Fed has to tighten without potentially pulling the plug on the party), The Bloomberg U.S. Financial Conditions Index – a gauge of financial-market health based on stock, bond and money markets – is approaching the highest levels since 2007…
Ahead of the rate-hike, and dot-lot adjustment, the markets remain dramatically underimpressed by The Fed’s rate trajectory forecast (though we note that FF futs are now flat in 2020 while OIS still sees a potential rate cut)…
IIF’s Robin Brooks points out the 3 key numbers for today’s Fed:
(i) 2.9% estimate for neutral (blue);
(ii) 2020 end-point of 3.4%, i.e. restrictive policy (black); and
(iii) market pricing of 2.8% for 2020 (red).
Neutral (blue) may start moving up today and more next year, which will pull up the red line.
Since The Fed hiked rates in June, the Treasury curve has seen yields rise notably…
But the Yield curve has collapsed…
And the dollar has largely traded sideways…
So despite its apparently hawkish tilt in June – The Dollar has gone nowhere and the yield curve has collapsed – seems like The Fed needs to get the market on board soon.
And cue the “Goldilocks” word before the close…
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