Hiking Interest Rates Into 2019

Santa was in a bad mood this year. Maybe that was the Fed’s fault…

The stock market hated the outcome of Wednesday’s (December 19) Federal Open Market Committee (FOMC) meeting.

Following the meeting, the Treasury bond yield curve flattened out in disbelief. The Dow Jones Industrial fell about 900 points from its pre-meeting highs – almost 350 points lower on the day.

Remember just a few weeks ago when the long-term Treasury was trying to push above 3.4%?

After Fed Chair Jerome Powell and his crew of monetary policy voters decided on another quarter-point hike of the federal funds rate, the long-term Treasury yield fell below 3% before bouncing back slightly above 3%.

Bond traders seem to be worrying about a global slowdown.

Meanwhile, the Fed has yet to see any evidence of a slowdown and has plans to follow through with up to two more hikes next year. The Committee did drop plans for a third hike in 2019… though that wasn’t enough to soothe markets last Wednesday… or the rest of last week for that matter.

How they end the year is anyone’s guess.

Treasury yields held steady last week, but the 10-year yield ended the week below 2.8% and the yield curve is close to becoming completely flat. In other words, the difference in short-term and long-term yields is negligible and flashing a recession warning sign.

Inflation Update

The Bureau of Economic Analysis released November personal income and outlays figures last Friday.

Personal income disappointed by moving up 0.2% on the month, falling from a 0.5% rise in October. The estimate was for a 0.3% rise in income.

Consumers racked up debt as spending rose 0.4% in November on expectations of a 0.3% rise. October spending was revised up from 0.6% to 0.8%.

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditure index – or the PCE price index – rose just 0.1%, matching the same subdued rise last month. The expectation was for a 0.2% rise on the month.

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