LSA Connect

Fed Note:

The Federal Reserve Open Market Committee raised the fed funds target rate by 0.25% to a new level of 2.25-2.50%.  This was widely anticipated, with a high futures market probability of this outcome beforehand.  There were no committee dissents.

The formal statement was little altered from November, noting that economic activity remains strong, unemployment remained low, household spending has continued to grow, business fixed income has moderated, and inflation remains near the policy target.  However, there was a tempering of language in terms of further rate hikes (including insertion of the word ‘some’) as well as a comment that the Fed ‘will continue to monitor global economic and financial developments’ for assessment in future policy actions.  Overall, the updated economic output pointed to a base case of about two interest rate increases next year.

The issue as of late has been a pause in economic acceleration, with building fears that the peak in economic activity has been reached, and an eventual slowdown and recession being the next stop.  However, it is possible this assumption may still prove premature.  In keeping with changing data, what was once thought of as a done deal—a continuation of this same pace of rate hikes into 2019—is now looking far less certain.  Initial estimates by a variety of economists of 2-4 hikes next year have fallen back to 1-2, in keeping with the Fed’s assumptions, with the caveat of policy activity remaining even more ‘data dependent’ than usual.  Chair Jerome Powell’s comments during the last several weeks have confused markets a bit—with initial comments alluding to the current fed funds rate being ‘far below’ the ideal level, while more recent discussion pointed to the current rate being ‘just below’ ideal.  Probabilities for future hikes are certainly dependent on this changing sentiment and communication posturing to a certain degree.

On the dashboard:

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Economic Update 12-10-2018

• Economic data for the week was highlighted by stronger results for ISM reports in manufacturing and services, while factory orders and employment numbers for November came in showing slower growth than expected.
• Global equity markets slumped, with foreign faring a bit better than U.S. with help from a weaker dollar.  Government bonds performed well, being the recipient of investor flows.  Commodities rebounded as well, as crude oil prices rebounded higher.

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