Fed Rate Hike: Resetting Expectations

Fed Rate Hike: Resetting Expectations

Wednesday’s announcement provides a new starting point for Fed-watchers.

Federal Reserve Rate Hike

 

"The Federal Reserve (Fed) did not disappoint at its March 21 meeting, tightening monetary policy by another 25 basis points (bps). This move was widely anticipated and marks the sixth hike during the current tightening cycle—with more to come."

"The biggest change to the Federal Open Market Committee statement text was on the inflation front, where the timeframe for reaching its 2% target quickened. Yet the Fed’s dot plots did not reflect this change in the inflation target. In fact, the growing speculation leading up to this meeting turned out to be much ado about nothing. The markets had braced for four rate hikes this year: however, the Fed telegraphed three rate hikes for the remainder of 2018."

"We have maintained the Fed will not act aggressively this year because officials are aware that tightening too quickly could negatively affect equity performance. Ultimately, we think signaling three rate hikes gives the Fed an option to change the pace of tightening later in the year if necessary."

"As the Fed becomes more active at the front end of the curve, the spread between the 10- and 30-year Treasuries should either remain stable or even contract. We expect that 10- and 30-year Treasuries should remain range bound this year, which should be a net positive for equities."

-- Jack McIntyre, Portfolio Manager, Brandywine Global
 

"The Fed appeared moderately optimistic on continuing growth and tame inflation -- based on its statement language, positive revisions to the FOMC’s Summary of Economic Projections and comments made by Chairman Powell during the post-meeting press conference. 

Currently, the Fed’s interest rate projections forecast 3 hikes  in 2018, followed by another 3 in 2019. [But] the Fed could hike a total of four times this year, given the positive economic outlook and the hawkishly shifting committee projections reflected in the distribution of the dots. 

We do not believe that more than four hikes is a possibility as 1) inflation is unlikely to rise at a rapid enough of a pace to induce faster tightening and 2) the FOMC only conducts four meetings per year that are accompanied by economic projections and a press conference.  That said, it would be tricky from a forward guidance standpoint to hike during other meetings.

Chairman Powell did indicate that the idea of more meetings being accompanied by a press conference is being taken into consideration.  However, it would take some time to get the market comfortable with this idea.  As such, we think that it wouldn’t be until 2019 should this idea come to fruition.  If it does, four or more hikes taking place in 2019 wouldn’t be out of the question."

 -- John Iborg, Portfolio Manager, QS Investors

Prior to the announcement, fixed income manager Western Asset had expressed skepticism about whether inflation would be strong enough to justify a faster pace of hikes. 

 

"Maybe the US expansion will go on longer and be more vibrant than the Fed is currently thinking it will. Maybe the Fed’s estimate of the terminal funds rate will have to be raised. But those are some pretty big ifs to be already priced in [to the markets]. "

-- Ken Leech, Chief Investment Officer, Western Asset 

“Whatever near-term impact...the tax bill might have, we think nominal spending growth will hold at its tepid, steady rates of the past nine years, [and] that slow spending growth will continue to restrain inflation.”

– Michael Bazdarich, Economist/Product Specialist, Western Asset

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