Fed Recap: ‘Some’What Dovish Hike Not Enough For Stocks

Heading into arguably the last major market event of 2018, traders felt they had a decent grasp on what the Federal Reserve would do.

Despite a wobble in financial markets and rising global concerns over the last few months, delaying the long-telegraphed interest rate increase would likely do more harm than good, as we noted in our numerous Fed preview reports. That said, with fears of a global economic slowdown in 2019 on the rise and the yield curve nearing inversion, traders expected a so-called “dovish hike,” with Powell and company emphasizing that future monetary policy decisions would be heavily data dependent, with the potential for a substantial pause in the rate hike cycle if the US economy turned south.

In other words, the market pretty much nailed it:

1) The Interest Rate Decision and Statement

As widely expected, the Fed raised interest rates by 25bps to the 2.25-2.50% range, marking the 9th such interest rate increase since the Fed left zero interest rate policy (ZIRP) behind in December 2015. The decision to raise interest rates was unanimous (perhaps on-the-fence voters opted to show solidarity with Chairman Powell rather than be seen bending to political pressure?).

That said, the central bank did make some (slight) dovish tweaks to its monetary policy statement. Policymakers reiterated that the risks to the economic outlook were “roughly balanced,” but did add a clause about continuing to “monitor global economic and financial developments and assess[ing] their implications for the economic outlook.” The central bank also updated its forward outlook, noting that “some further gradual increases” in interest rates are expected. Many analysts expected Powell and Company to remove the “further gradual increases” wording entirely, so while this is a marginal dovish shift, it may be less dovish than traders were anticipating.

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