Bah Humbug: U.S. Markets Tumble To Yearly Lows After Fed Guidance Projects More Rate Hikes For 2019

Markets hit the rewind button this afternoon as the U.S. Federal Reserve (the Fed) talked about the need for “some” further rate hikes in 2019.

While the Fed raised interest rates again today by 25 basis points, Chair Jerome Powell reiterated that the central bank will adopt a data-dependent approach when it comes to weighing future rate hikes going forward. Major indexes, which had stumbled to their worst December start since the Great Depression1, were rallying this morning in anticipation of a more dovish outcome, but have since given up all of those gains and then some. The S&P 500® Index fell over 1.5% to 2,506, while the Dow Jones Industrial Average sank over 350 points to 23,323—both hitting new lows for the year.

In our view, the Fed threaded the needle today—raising rates and forecasting “some” further hikes, but marking down the anticipated number of rate increases for next year from three to two as concerns over the health of the global economy and financial markets have grown.

Today’s rate hike, the fourth of 2018, means that the Fed has now—somewhat boringly—taken tightening steps at every quarterly press conference meeting dating back to December 2016.

Those decisions, in our view, have been well justified. At the risk of oversimplifying U.S. monetary policy, Chair Jerome Powell really appears to only care about two things:

  • First, he wants U.S. workers to have jobs. With the unemployment rate hovering around a 49-year low, Powell should feel pretty good about the full employment component of his dual mandate.
  • Second, he wants to make sure the economy doesn’t overheat (translation: keep inflation stable at around 2%). The next batch of core personal consumption expenditures (PCE) inflation data will be released this Friday. Our expectation is that it will come in at 1.9% on a year-over-year Admittedly, that’s a smidgeon below the central bank’s price stability target, but for all practical purposes, inflation is where the Fed wants it to be as well.
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