Daily Market Color

Fed Hikes as Expected, Provides Hawkish Forward Guidance

Jeff Davenport


Fed Hikes Rates and Near-term Outlook

The much anticipated FOMC meeting concluded this afternoon, the highlights of which include:

Rate Hike of 0.25%: The FOMC voted unanimously to raise its benchmark borrowing rate by a quarter point, bringing the target range to 1.75%-2.00%, in-line with expectations.



Upward Revision to Dots: Eight of the 15 Fed policymakers now anticipate the need for two additional quarter-point rate increases in 2018 (four increases for the year in total), while maintaining the projection for at least three more hikes in 2019 and one more in 2020.  This would ultimately leave the median fed funds rate at 3.4% by 2020 year end.



2018 GDP, Inflation Expectations Higher: Projections for GDP this year were increased to 2.8% from 2.7%, and core inflation growth forecasts were upwardly revised from 1.9% to 2.0%.



Labor Market Tightening: Expectations for the unemployment rate shifted down from 3.8% in 2018 and 3.6% in 2019 to 3.6% and 3.5%, respectively.



More Press Conferences:  Beginning in January 2019, Fed Chairman Jerome Powell will hold press conferences after every central bank meeting (currently they take place every other meeting).  “Having twice as many press conferences does not signal anything about the timing or pace of future interest rate changes,” Powell stated. “This is only about improving communication.”  

A word-for-word comparison of today’s FOMC statement vs. May’s can be found here.


Market Reaction to Fed Announcement

All three major US stock indices were lower to close the day, as equity markets hit the risk-off button in response to the FOMC’s rate hike decision and hawkish forward guidance.  The DJIA (-0.47%) and S&P 500 (-0.4%) experienced the largest reversals, while the NASDAQ managed to finish only 0.11% lower. US Treasurys similarly sold off immediately following the Fed announcement, with yields/swap rates climbing 1-3bps across the curve.  The yield curve continued to flatten, as the 2s10s spread narrowed to less than 40bps (11-year low), and the 5s30s spread declined to 52bps.  The 2-year yield (2.57%) is now at its highest level since 2008.  The US dollar (USD) fell 0.1% against major currencies, led by a 0.4% decline vs. the euro (EUR).  WTI crude oil futures were up on the day on the news of an unexpected drop in US inventories, gaining 0.5% to close at $66.70/barrel.   



Inflation Pressure Building at Business Level

Key economic data releases on the day were highlighted by May’s producer price index, which reflected accelerated inflationary growth in the prices received by domestic producers of goods and services.  The 0.5% monthly increase beat market expectations of +0.3% and was a strong uptick from April’s +0.1%.  Much of the rise was attributed to surging energy costs (+9.8%), however steady increases were recorded across most major sectors. The core PPI also exceeded median forecasts, reported at +0.3% MoM.  Looking at producers’ inflation over the past year, overall producer prices have increased 3.1% (highest since January 2012) while core prices have risen 2.4%.


Jeff Davenport

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