Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (FOMC) increased the Fed Funds rate target range by 25bps to 2.25% ‐ 2.50%.
The December FOMC statement contained some modest changes in order to reflect the Committee’s awareness of the recent tightening in financial conditions and softening in the global economic backdrop over the intra-meeting period. Nevertheless, the Committee still views the risks as “roughly balanced” bolstered by a strong labor market and consumer. In addition, the Committee still views “some further gradual increases” in the Fed Funds Rate as appropriate. Although the statement did not reference the balance sheet normalization process, the decline in the Fed’s asset holdings will continue in the background at the max run-down rate (30bln Treasuries / 20bln MBS).
We can break the statement into two parts:
There were no dissenters. Michelle Bowman, a new member of the Board of Governors, voted for the first time at this meeting.
Summary of Economic Projections
Within the projections, the growth and inflation forecasts were downgraded for 2019 but mostly unchanged in the out years. Growth was downgraded in 2019 from 2.5% to 2.3% and core PCE from 2.1% to 2%. The median forecast of core PCE no longer shows a small overshoot above the Fed’s inflation target in 2020 & 2021. The unemployment rate estimates were also mostly unchanged.
The median dot for 2019 shifted from signaling 3 rate hikes to just 2 increases. The 2020 dot was unchanged reflecting 1 additional rate hike, which would bring the Fed Funds rate to 3.125%. The median of the committee expected no change in the Fed Funds rate between 2020 and 2021, the same as last meeting. The long-run dot declined from 3% to 2.75%.
While investors had priced in a high probability of a rate hike at this meeting, the probabilities reflected within the futures market for any additional rate hikes in 2019 has significantly diminished. The market was watching closely for confirmation that the pace of rate hikes will slow next year compared to the 4 rate hikes completed in 2018.
Chair’s Press Conference
Chair Powell remained upbeat on the US economic outlook but recognized some “cross-currents” had emerged in the intra-meeting period. In general, he viewed that the economic outlook in the US has not fundamentally changed as a result of developments over the intra-meeting period but that policy was not on a “pre-set” course. He also spoke about the possibility that growth would moderate in 2019 as fiscal policy was more front-loaded than originally anticipated.
Starting in 2019, all FOMC meetings will be followed by a Press Conference.