The only sign of relenting by the Committee can be seen in the forward rate projections of the terminal, or neutral, long run interest rate which dropped from 3 percent to 2.75 percent. Otherwise, it appears that Federal Reserve Chairman Jerome Powell and the other voting members believe the economy is strong enough to absorb two more rate hikes in 2019 and the continued shrinking of the balance sheet. This was the 9th time the Committee hiked interest rates since December of 2015 and the new upper bound for the Fed Funds rate is 2.50 percent.
The chart above tries to “Connect the dots” of the Fed’s game plan. Essentially, each curve represents the financial markets best guess at each point in time for the Fed’s path to higher rates. As the chart indicates, while more rate hikes are expected, as of December 2018, the general consensus of the market is less bearish than in June of this year.
...Fed members left their outlooks for economic growth, employment and long-run inflation largely intact...
Fed commentary on the economy was positive stating “economic activity has been rising at a strong rate” and maintaining that the “risks to their outlook is roughly balanced.” In a press conference, Powell cited both positives for the economy such as a strong labor market and wage gains, while pointing to some developments that suggest growth is softening. He said relatively benign inflation gives the Fed room to be patient in setting policy.
The changes to the economic forecasts released along with the FOMC policy statement show that Fed members left their outlooks for economic growth, employment and long-run inflation largely intact.
- The median 2020 and 2021 forecasts for GDP growth were unchanged at 2 percent and 1.8 percent, respectively, while the longer-run figure increased to 1.9 percent from 1.8 percent.
- The median unemployment-rate estimate for 2019 was unchanged at 3.5 percent, while the 2020 estimate increased to 3.6 percent from 3.5 percent. The longer-run figure fell to 4.4 percent from 4.5 percent.
- The median estimates for PCE and core PCE inflation each fell by 0.1 percentage point in 2019 to 1.9 percent and 2 percent, respectively.
Ultimately, the message from the FOMC was not the gift investors were looking for but there was a slight shift in tone and perhaps the stage has been set for a pause in rate increases in 2019. Chairman Powell was emphatic that political considerations would not play a role in Fed policy making when questioned by reporters. However, a sudden change in the trend of economic data or perhaps a further deterioration in the geopolitical environment will certainly be a factor in Fed policy making for 2019.