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Fed Recap: Accommodative No More

As we noted in yesterday’s FOMC Preview report, another rate hike this month was a “done deal” for the Federal Reserve, and Powell and Company delivered the expected 25bps increase as expected. The more interesting aspects of today’s release came from the central bank’s accompanying monetary policy statement and the quarterly Summary of Economic Projections.

The central bank made just one change to its monetary policy statement, but it was a doozy: The Fed dropped its long-standing reference to monetary policy remaining “accommodative.” While this change was inevitable at some point (after all, the central bank has stopped QE, started tapering, and raised interest rates eight times in the last few years), the timing suggests that Fed policymakers believe they are nearing a “neutral” interest rate. Of course, with inflation hovering around the Fed’s target, unemployment currently below its projected “longer-run” level, and plenty of fiscal stimulus flowing through the economy, there’s a strong case for above “neutral” interest rates over the next year or more, so this change does not signal an imminent end to the current rate hike cycle.

Speaking of interest rates, the Fed also released its member’s estimates for key economic variables in the future. Of note, the expected path of interest rates is starting to tighten, with outlier projections coming back toward the median member’s expectations in 2019, 2020, and the so-called “Longer-Term.” The median interest rate dot remained unchanged in 2018 (2.375%), 2019 (3.125%), and 2020 (3.375%), the median longer-run dot for the neutral interest rate ticked up slightly to 3.000%. Meanwhile, the central bank also revised up its forecasts for GDP growth in 2018 and 2019 (to 3.1% and 2.5% respectively), though it opted to revise its forecast for Core PCE inflation a tick to just 2.0% in 2019.

All in all, these forecasts suggest that the Fed believes the economy is evolving as expected, and that it is on track for five more rate hikes (one in December, three in 2019, and one more in 2020). Fed funds futures traders are somewhat reassured as well, with the pricing for a December rate hike ticking up from about 80% before the release to 86% as of writing.

Fed Chair Powell has just taken the stage to deliver his press conference on the decision and is underscoring the generally optimistic tone of the statement and projections. Notably, he stated that the decision to drop the “accommodative” wording from the statement did not signal change in policy, merely that the economy is moving in-line with expectations. We’ll continue to monitor the press conference for any other market-moving developments on our twitter account.

Market Reaction

Markets have seen a choppy initial reaction to the Fed festitivities, with the dollar initially selling off by about 40 pips against its major rivals before staging a comeback to trade higher as of writing. Correspondingly, stocks and bonds initially rallied on the perceived “dovish hike” before reversing back to roughly unchanged levels. As we go to press, major US indices are trading higher by about 0.2%, with the benchmark 10-year Treasury yielding 3.06%. Both gold and oil are ticking lower on the day.


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