E The Fed’s Interest Rate Outlook For 2019 Is Slightly Less Aggressive

“The Federal Reserve on Dec. 19th raised interest rates for the fourth time this year. The Fed increased the target range for its benchmark interest rate by 25 basis points to a new band of 2.25%-2.5%, putting the Fed funds rate at its highest level since the spring of 2008... Along with its latest policy statement the Fed also released an updated set of economic projections, which shows a downgrade in the Fed’s forecast for interest rate hikes next year... The longer-run neutral rate of interest that is expected to sustain full employment and price stability also fell slightly in December, with the median FOMC forecast now indicating the neutral rate is 2.8%, down from 3% in September.” (Yahoo, The Fed’s FOMC Decision, Dec. 19, 2018)

The Fed has increased its benchmark interest rate (the federal funds rate) nine times since December 2015, with the Dec 19th rate hike its latest move.

The latest 25 basis points rate hike brings the federal funds rate up to 2.25% to 2.5%.

The Fed also made a keyword change to its forward guidance, indicating that “some further gradual increases” in the Fed funds rate would be warranted. This alters the previous language that had simply said “further gradual increases” would be necessary. The word change and the accompanying projections suggest that the Fed may be closer than the market realizes to the end of its current tightening cycle.

The latest interest rate hike was widely expected and has understandably been garnering most of the attention, yet the announced continuation of balance sheet shrinkage is also equally important.

As many investors remember the Fed’s balance sheet increased dramatically and changed in the composition after the financial meltdown in 2017. The Fed’s total assets increased from $870 billion on August 8, 2017, to a peak of $4.5 trillion on Jan. 14, 2015. Since then, under its balance sheet normalization program, total assets declined to $4.2 trillion as of December 12, 2018. This year alone, total assets at the central bank have declined by roughly $310 billion.

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Thorgood 3 months ago Member's comment

The guy's an idiot. He pretty much guarantees two rate hikes but then says he's data dependent so he's making a premature decision based on what he claims he makes his decisions off of unless of course he has the proverbial crystal ball into 2019. He should have shut up after the written statement- he deserves to be fired. Or at least muzzled. Trump, are you listening?

William K. 3 months ago Member's comment

How about if that bunch of greedy guys raise the interest rate enough to reduce inflation to less than 1% per year??

Thorgood 3 months ago Member's comment

That would be really stupid. It would kill the little guy and our economy, and take cap ex to a grinding halt. Our economy isn't strong enough to weather that. Inflation isn't the threat. Layoffs would escalate and housing would die. Think before you speak. Powell already said screw you to the little guy with this latest increase.

William K. 2 months ago Member's comment

Certainly it would raise the cost of borrowed money, and probably force a lot of people to consider more carefully just exactly what they were going to do. But not all of us run on borrowed money, some actually put part of our profits back into the business. A 10% interest rate would not damage my organization at all.

Linda Willis 3 months ago Member's comment

That would be nice.