Daily Market Color

Fed Hikes as Expected, Updates Forward Guidance


Fed Hikes Rates, Expands Outlook

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

Rate Hike of 0.25%: As expected, the FOMC voted unanimously to raise its benchmark borrowing rate by a quarter point, bringing the target range to 2.00%-2.25%, the highest it has been in the past decade.



Upward Revision to Dots: 12 of the 16 Fed policymakers now anticipate the need for a fourth quarter-point rate increases in 2018, 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 between 3.25% and 3.50% by 2020 year end.  In 2021 and beyond, two-thirds of the officials projected short-term rates in the 2.75%-3.00% range.



2018 GDP Revised Higher: Projections for GDP this year were increased to 3.1% from 2.8%.  The long run expected growth rate remained near 1.8% per year.



Labor Market Normalizing: Expectations for the year-end unemployment rate this year shifted from the 3.6% in June to 3.7%.



Inflation Remains At/Above Target: Officials forecast the inflation rate holding between 2% and 2.3% over the next several years.



Removal of Accommodative: In the FOMC statement released following the policy decision, the description of monetary policy as “accommodative” was struck from the text.

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


Market Reaction to Fed Announcement

US Treasurys rallied following the announcement of the monetary policy decision and press conference with Fed Chair Jerome Powell.  While the actions from the Committee fell mostly in line with the market’s expectations, comments from Powell on consumer prices were a bit more dovish than anticipated.  “The main thing where we might need to move along a little bit quicker if inflation surprises to the upside. We don’t see that,” Powell stated.  Yields/swap rates finished the day 2-6bps lower across the curve, with the 10-year note yield settling just under 3.05%.  Major stock indices rallied immediately following the announcement, but reversed course later in the session to finish 0.21%-0.40% in the red, weighed down largely by declines in the financial sector.  In commodity markets, WTI crude futures sunk 1% to $71.60/barrel after a report from the Energy Information Association displayed a surprise build (+1.9 million barrels) in US stockpiles.


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