Wednesday’s Fed decision needs no introduction.
Jerome Powell has endured withering criticism from all corners since his October “long way from neutral” communications misstep, and the pressure was ratcheted up materially this week with everyone from Stanley Druckenmiller to Jeff Gundlach to (oddly given his track record) Kevin Warsh imploring the beleaguered Fed chair to take a pause.
Donald Trump has of course piled on like never before, warning the Fed against “mistakes” and demanding that Powell “feel the market.”
Read more in our full December Fed previews
Those who are somehow late to the story can catch up via the two expansive previews linked above, but suffice to say the market is expecting a dovish hike, with downgrades to the growth assessment working together with tweaked language in the statement and a shift lower in the dots to deliver the only thing the market really wants for Christmas.
Quickly running through the charts (for context) finds stocks sharply lower since Powell’s “long way from neutral” debacle and financial conditions much tighter.
Here’s a quick look at the dollar and Libor, both reflective of tighter liquidity.
Tighter financial conditions, the stronger dollar and mounting concerns about global growth are bleeding inflation expectations and that slow-bleed is exacerbated by crude’s collapse.
Tech stocks have been crushed and credit spreads have ballooned wider.
Markets are hyper-concerned about the curve and the inversion in the 2s5s and 3s5s lends credence to the slowdown narrative.
And vol. ratios show rates vol. remains the odd man out, as the Fed’s convexity management efforts and a tight policy gap have kept rates vol. relatively subdued amid the chaos.
Finally, the market is pricing just ~10bps of tightening in 2019 and is increasingly pricing in easing in 2020, meaning the bar for delivering a “dovish surprise” was set very high.
That, ladies and gentleman, was the setup and without further ado, Jerome Powell has hiked, defying markets and Donald Trump.
The immediate takeaways: The growth projection for 2019 moves to 2.3 from 2.5, the median dot for next year shifts to 2 and the Fed has added “some” to the statement language.
That said, the language in the statement betrays little in the way of evidence to support the contention that the committee’s reaction function has changed or that recent data have prompted Powell to reassess his upbeat take on the U.S. economy.
There’s a passing nod to market conditions, but it’s probably not enough to satisfy those hoping for a “clean relent”, so to speak.
Additionally, it still seems as though the Fed could move into modestly restrictive territory at some point.
With that in mind, note that Powell’s opening remarks in the press conference found the Fed chair emphasizing that assessments of whether policy is “accommodative”, “neutral” or “restrictive” will vary depending on who you ask going forward. If you ask Donald Trump, policy is already too “tight.”
We’ll have more on the presser later as well as Wall Street’s reaction.
Below are the bullet point highlights from the statement, the dots, the projections, and the full statement.
- Fed ‘judges that some further gradual increases’ warranted
- Fed median dot shows two 2019 hikes vs three in prior est.
- Fed median est. for neutral funds rate 2.8% vs 3% prior est.
- Fed median shows funds rate 2.9% 2019, 3.1% 2020, 3.1% 2021
- Fed’s range of neutral-rate estimates unch at 2.5% to 3.5%
- Fed median sees longer-run jobless rate 4.4% vs 4.5% prior est.
- Fed sees 2019 gdp growth 2.3% vs 2.5% in prior est.
- Fed sees unemployment rate 3.5% end-2019, unch vs prior est.
Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.