The Fed did not deliver what the market was expecting...
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The Dow is down over 10% since The Fed last hiked rates in September, with the dollar, gold, and the long-bond up around 4%...
And as stock prices have plummeted, so has the market's expectations for how hawkish The Fed will be...
And even the odds of a hike today had tumbled (in an almost unprecedented manner)...
As financial conditions have tightened dramatically since The Fed hiked in September...
And The Fed is entirely decoupled from the market's view of the rate trajectory...
The economic data have been pretty strong, with the unemployment rate at a 48-year low and GDP this quarter tracking about 3%, according to the Atlanta Fed. On the other hand, stocks this week slumped to a 14-month low - not that's not in The Fed's mandate, right?
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So with that background, and expectations of a dovish hike established, here is the decision:
- FED RAISES RATES, SIGNALS TWO 2019 HIKES VS THREE IN SEPT. EST.
- FED 'JUDGES THAT SOME FURTHER GRADUAL INCREASES' WARRANTED
- FED: RISKS 'ARE ROUGHLY BALANCED,' MONITORING GLOBAL EVENTS
So a dovish hike - but not quite as dovish as some - certainly Goldman - had expected...
Looking at the dot plot, we find that 2019 pancaked:
Why the big change in 2019 dots? According to BBG economist Tim Mahedy, "the range of the 2019 dots narrowed as doves came up and hawks dropped down. The former is largely an adjustment to reflect that the Fed has raised rates twice since September, while the latter is a nod that the most hawkish members of the FOMC are lowering their rate paths. Today's release could be summed up as a somewhat dovish hike with a hedge that 'some further gradual increases' will still be needed."
And this is what rate the Fed expects now:
- 2018 median 2.375% (range 2.125% to 2.375%); prior 2.375%
- 2019 median 2.875% (range 2.375% to 3.125%); prior 3.125%
- 2020 median 3.125% (range 2.375% to 3.625%); prior 3.375%
- 2021 median 3.125% (range 2.375% to 3.625%); prior 3.375%
- Longer run Fed funds median at 2.8% compares to previous forecast of 3.0%
And perhaps the most important revision, the neutral rate range was dragged lower from 2.8%-3.0% in September to 2.5%-3.0% in December, confirming that the Fed Funds rate is now, indeed, just below the range of the neutral rate.
Commenting on the dots, Bloomberg economists note that "The preliminary analysis of the dot plot suggests the core of the committee, which includes most governors, prefers two more hikes next year. The median dot appears to be in line with the median dot of voters at 2.9%, in our view."
GDP and Inflation outlooks were also cut:
- Fed median sees longer-run jobless rate 4.4% vs 4.5% prior est.
- Fed sees 2019 gdp growth 2.3% vs 2.5% in prior est.
- Fed sees unemployment rate 3.5% end-2019, unch vs prior est.
- Fed cut Core PCE from 2018 to 2021
- The NAIRU - the lowest level the unemp rate can drop without sparking inflation - was cut again, from 4.5% to 4.4%.
The Fed was very non-committal to the "data-dependence" language relative to what was hoped for, with the following key addition:
"[Fed] will continue to monitor global economic and financial developments and assess their implications for the economic outlook."
The statement also saw the curious addition of the word "some" as in "some gradual increases" in the fed funds rate.
According to Renaissance and Bloomberg US economists:
"the key changes are in the second paragraph. I would call this hawkish relative to market expectations but a baby step in the direction of dovish. Monitoring closely is the language adopted in 2016 right before they did not hike for a while. Statement is main conduit for communications."
"The addition of the word `some' to the `further gradual increases' language in the statement is not a dovish signal, but rather the Fed's way of saying it would like to retain flexibility while approaching the neutral stance."
The last notable, if bizarre, word change: from "Committee expects" to "Committee judges."
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Full Redline below: