Instant Analysis: FOMC Decision for December
The outcome of the December FOMC meeting was what we have been forecasting. We got a quarter-point rate hike today combined with a dovish tilt to the FOMC statement language, and a reduction in how many more Fed funds rate hikes investors can expect in 2019.
But will it be enough for investors who have been pricing in no additional Fed rate hikes in 2019? Right now it appears investors are throwing a tantrum. The Dow is down 1.7%, and the NASDAQ is down 2.4%. Treasury bond yields are now dropping across the curve, and the curve is inverted between the 2-year and 3-year and the 2-year and 5-year maturities. The 10-Year Treasury yield is slumping 5.5 basis points to 2.76%.
The FOMC median forecast for the number of quarter-point rate hikes they expect by the end of 2019 dropped from three hikes to two, but one additional quarter-point rate hike is still in the Fed’s median forecast for 2020. The Federal Reserve raised the fed funds target rate by a quarter-point percentage point today to between 2.25 and 2.50 percent. It also raised the interest rate on excess reserves by 20 basis points to 2.40% to help keep the effective fed funds rate within the target range. The decision was unanimous.
The FOMC softened their guidance a bit on future interest rate hikes by changing its language in the statement to, “The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion…,” from the language in the September statement, “The Committee expects that further gradual increases in the target range for the federal funds rate with be consistent with sustained expansion.”
The Committee judges that the risks to the economic outlook are still roughly balanced. However, it gave a nod to the growing downside risks from the global economy, adding the clause, “but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
The FOMC median GDP forecast for 2019 fell by 0.2 percentage points to 2.3%, and the core and overall PCE inflation forecasts were downgraded by a tenth of a percentage point.
Bottom line: The downward adjustments to the FOMC’s GDP, inflation, and fed funds rate forecasts since the September FOMC meeting remain relatively minor, though the FOMC statement does acknowledge the possibility of growing downside risk from the global economy and global financial markets. At this point, we see no reason to adjust our fed funds rate forecast for 2019 or 2020 due to this decision. We continue to forecast two quarter-point rate hikes from the Fed in March and in June, before a pause. However, we acknowledge the Fed is much more data-dependent now and could decide to space out the two rate hikes in 2019, depending on how the data and markets evolve. We still expect the Fed to start cutting interest rates again in 2020, as U.S. GDP growth slips below its potential pace.