Markets Not Reassured by Today’s Signals from the Fed

December 19, 2018

The FOMC statement accentuated the U.S. economy’s strong trends of domestic demand and labor market conditions. Comments about inflation were not modified. Concessions to recent jittery markets, President Trump’s criticism that raising interest rates is inappropriate, and the tilt in global data from mostly better-than-expected to primarily softer-than-expected results were slight and worded in a somewhat ambiguous way.

As expected, the federal funds target was increased by 25 basis points to a range 2.25-2.50%. That is the ninth such move of the tightening cycle. The number of likely moves next year implied by the dot-plot diagram was reduced from three to two, but officials still see one increase also happening in 2020, bringing the level to a slightly restrictive stance. A modifying adjective, “some” was added to the expectations of “further gradual increases in the target range of the federal funds rate,” presumably to signal that the rate level is closer to the peak of the cycle that it has been previously. Projected growth still exceeds the longer run non-inflationary speed limit in both 2020 and 2019, and inflation is projected hovering around its target.

A catch phrase repeated often in Chairman Powell’s press conference is that future decisions will be “data-determined,” and he underscored that whether it be hard economic data, market-generated feedback, or anecdotal evidence, the Fed continues to look at enormous pools of information. At each meeting, officials decide merely where to set policy tools at that moment in time based on what they see and what they believe is most likely to happen. Forward guidance is always conditional and subject to change as new facts unfold.

Markets did not react well to the FOMC’s message. The DOW touched a 14-month low of 23,163, 3.7% below its intra-day high and recorded a Tuesday to Wednesday net loss of 1.5%. The 10-year Treasury yield fell another five basis points. President Trump may call these moves a vote of no confidence in monetary policy, but his many appointments to replace vacancies on the Board of Governors gave him the opportunity to reconstitute the FOMC in whatever image he sought. The problem is that the growth projections used by the Trump administration to justify flawed fiscal changes are incompatible with the central bank’s mandates. Other policies on trade and immigration also undermine the administration’s growth objectives.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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