As we noted yesterday, the excitement around today’s FOMC meeting wasn’t about the interest rate decision itself: The Fed delivered its expected 25bps rate hike, bringing the benchmark rate to the 1.75-2.00% range, to little fanfare. Nonetheless, there was still plenty for traders to digest across the central bank’s monetary policy statement, summary of economic projections, and Chairman Jerome Powell’s press conference.
1) The Monetary Policy Statement
Investors are usually left reading between the lines of this statement to try to divine the intent of the FOMC voters, but today’s report painted a clear picture. Every update from last month’s statement reflected a stronger economic recovery than previously assumed:
- The assessment of economic activity was upgraded from “moderate” to “solid” growth.
- It was noted that the unemployment rate “declined” (from “stayed low”).
- Household spending has “picked up”
- A sentence about “market-based measures of inflation remaining low” was removed.
- The central bank tweaked a statement about interest rate “adjustments” to “increases” moving forward.
- Economic activity is now expected to see “sustained expansion”
- A paragraph about “gradual increases in the federal funds rate remaining below the longer-term average”
2) The Summary of Economic Projections
While the statement was full of flowery verbiage describing a stronger economy, the economic projections put hard numbers to that view. Most importantly, the median Fed members’ “dot” of interest rate expectations rose to reflect two more (for a total of four) interest rate increases this year. Additionally, the median Fed member still expects three more rate hikes next year, which if seen, would mark a full 11 increases off the Great Financial Crisis lows.
Supporting the case for more aggressive interest rate rises moving forward, the expectations for real GDP growth this year were increased (from 2.7% to 2.8%), the expected unemployment rate for year-end 2018, 2019, and 2020 were all revised lower (to 3.6%, 3.5%, and 3.5% respectively), and the expected inflation rate for 2018 also rose slightly (from 1.9% to 2.0%). Put simply, the Fed believes the economic outlook has notably improved over the last six weeks.
3) Chairman Powell’s Press Conference
We’re headed to press with the press conference still ongoing, but so far, Chairman Powell is striking a relatively moderate tone. He’s noted the expected support from fiscal policy (read: last year’s big tax cut), as well as reiterating that the US economy “is in great shape.” That said, he also cited the slow pace of wage gains as a puzzle and identified rising concerns about global trade (tariffs and the potential for a “trade war”). As we speculated yesterday, Powell has also announced his intention to start holding press conferences after every FOMC meeting starting in January 2019.
Not surprisingly, the market initially read the optimistic statement and economic projections as a hawkish development. As a result, we saw treasury yields rise by 2-3bps across the curve, US stocks dropped to daily lows, and the US dollar saw a quick rally, gaining about 40 pips against its major rivals.
However, since Powell has taken the stage, these initial moves have been fading. As of writing, the dollar index is back to nearly unchanged, US indices are actually trading higher than pre-Fed levels, and bonds have gained back a portion of their initial losses. While today’s statement and economic projections are clearly a hawkish development, Powell has reminded traders that the Fed’s actions will remain ultimately depend on incoming data, so traders should be wary not to overreact to today’s developments.