Fed hikes interest rates in December. Forecasts fewer rate hikes in 2019

Investors speculate Fed to keep rates on hold next year

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The U.S. Federal Reserve concluded its two-day monetary policy meeting last week. As widely expected, the central bank raised the benchmark interest rate by a quarter point. However, the central bank lowered its forecasts on future rate hikes.

The Federal funds rate was seen rising to 2.25% – 2.50%. This was the fourth rate hike this year, and the ninth rate hike since the Fed started to normalize interest rates in December 2015. The rate hike came just hours before the U.S. President Donald Trump tweeted against the rate hike.

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Trump said that it was incredible that the Fed was even considering another rate hike. The U.S. President has broken from the norms by voicing his views about the Federal Reserve and undermining its independence.

In early November, after repeatedly hitting out against the Fed, Chairman Jerome Powell surprised the markets with his dovish speech. Powell said that the U.S. Fed funds rates were near the neutral level.

This was in stark contrast Powell’s comments just a few weeks before where he said that the Fed funds rates were still a long shot away from neutral interest rates.

Following Powell’s dovish U-turn the markets expected the Fed to hike rates at this meeting in December but expected fewer rate hikes for the year ahead.

Despite lowering the interest rate projections, the Fed still expects to hike rates. Meanwhile, the market probability for a rate hike has fallen to zero meaning that investors do not expect the Fed to increase rates next year.

At the post-meeting, the monetary policy statement was however not entirely dovish. The FOMC included the statement that more rate hikes would be appropriate although the tone of the message was seen to be softer than before.

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term,”

Ahead of the meeting, the Fed had forecast three rate hikes in 2019 and one more rate hike in 2020 based on the projections given from the September Fed meeting.

However, following the stock market rout since October, the Fed was seen taking a softer approach. The FOMC forecast two rate hikes in 2019. The median forecast for interest rates for 2019 was reduced to 2.9% compared to 3.1% that was forecast in September.

It should be noted however that the Federal Reserve started out in 2018 with rate hikes but managed to hike interest rates four times this year.

The central bank also released its economic forecasts.

According to the economic projections, the central bank expects real GDP growth in 2018 and 2019 to average around 3.0% and then fall to 2.3% respectively. This was slightly lower compared to the September meeting’s projections of 3.1% and 2.5% respectively.

The Fed maintained the risks to the economy remain balanced but noted that it would continue to monitor the global economic and financial developments.

Following the meeting, the Fed Chair Jerome Powell said that interest rates were closer to the central bank’s neutral rate.

Powell said during the press conference:

“Where we are right now is the lower end of neutral, there are implications for that,”

Given that the Fed’s statement was not as dovish as expected, the markets responded appropriately. The U.S. dollar managed to close with some modest gains on the day. However, this wasn’t the case with the equity markets.

The S&P500 continued to decline including the Dow Jones industrials. Gold prices which were seen rallying ahead of the Fed meeting also erased the gains by the day’s close.

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