What the Fed did on Wednesday, how markets reacted, and a guide to additional insight.
As expected, the FOMC raised its target rate band for Fed Funds by 25 basis points, to the 2.00% to 2.25% range at the conclusion of its meeting on September 26.
As always, the Fed’s choice of language in its accompanying statement offered useful clues to future decisions. As in August, that statement described the U.S. economy as “strong”. But there was a significant change, too – the removal of the word “accommodative” from the Fed’s assessment of its own monetary stance, suggesting rates are now closer to a neutral level, i.e. one which neither boosts nor restrains the economy. That said, Chair Powell indicated in his press conference that the FOMC still sees policy as generally accommodative, but that the use of the word in the statement had come to the end of its “useful life”.
- What’s the significance of that change? Read Western Asset’s Accommodative No Longer?
In addition, the Fed’s well-known “dot plot”, containing the FOMC’s economic forecast and outlook for its own hikes, leaned even more strongly toward a fourth hike this year (likely in December), with 12 of 16 members anticipating that move -- up from 8 in June.
The immediate aftermath of the statement and press conference suggested fixed income markets saw the changes and comments in a generally positive light. U.S. 10-year yields moved downward, from 3.096% to 3.061%. In terms of the yield curve, the reaction was generally in the direction of flatness, with 2 year-10 year (2-10) spreads moving down slightly to 23.6 basis points.
But equities were another matter. The S&P 500 fell as much as 1% between the time Mr. Powell described inflation as “tepid” and when he opined, in response to questions, that the FOMC might consider moving rates above some unspecified “neutral” level under certain conditions. The index ended the day down (9.6) points, or (0.30) percent to 2905.97.
The U.S. dollar also swung back and forth in response to the comments, but ended the day roughly where it started.
For more on interest rates and the Fed, check out:
All data Source: Bloomberg, September 26, 2018.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.