Rebel Without a Pause: Fed Raises Rates, But Gets a Bit More Dovish

Key Points

  • The FOMC moved as was generally expected, raising rates by 25 basis points and offering a slightly more dovish accompanying statement; albeit less dovish than some had hoped.

  • The Fed’s summary of economic projections were adjusted slightly, with both inflation and growth expectations lowered.

  • Emphasis was on the data dependency path the Fed will be on heading into 2019.

Although it wasn’t a forgone conclusion in the minds of some, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points today, to a range of 2.25-2.5%, in a unanimous decision—the fourth time it raised rates this year. The Committee did pare back some of its projections for both interest rates and economic growth in 2019 and beyond. Specifically, the Fed now expects two hikes next year, down from three, while indirectly signaling they could pause their tightening campaign if incoming data so warrants.

Changes to the accompanying FOMC statement were minimal from last month, with the third one below most important:

  • The reference to the unemployment rate went from “declined” to “remained low.”
  • The word “some” was added to the language around “further gradual increases in the target range for the federal funds rate.”
  • Added to the assessment of risks to the economic outlook being roughly balanced, was “but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

The median FOMC estimate for the so-called long-run neutral rate fell from 3% in September to 2.75% in December. The median projection is for the fed funds rate to end 2021 at 3.1%, down from the September estimate of 3.4%.

Investors have been more pessimistic about the Fed’s path; expecting less than one rate hike in 2019. Coming into the meeting, and based on the fed funds futures market, there was only a ~70% probability of a rate hike today. That was the lowest probability heading into an FOMC meeting during this entire cycle, which began in December 2015.