Market Backlash

The Treasury market had priced in a 25-basis-point increase in the FOMC’s target range for federal funds prior to the FOMC’s December 18–19 meeting. The Committee was faced with essentially three policy options: Pause, deliver on the 25-basis-point increase and signal a pause, or deliver on the 25-basis-point increase and signal the willingness to continue raising rates.

The decision was a 25-basis-point increase in the target range and a signal that the most likely path for 2019 included two more rate moves. Until the announcement and subsequent press conference, the Dow was up 300 points, but it plunged into negative territory when the FOMC delivered on what turned out to be a modified version of the third option. That market funk continued the next day. Markets clearly wanted a strong signal that the FOMC would pause in 2019, and traders weren’t mollified by the generally moderate tone struck by Chairman Powell in his press conference.

Different people took different messages away from the press conference. First, when asked what role recent market turmoil played in the FOMCs decision, Powell said – consistent with long-standing Fed policy – that market turmoil was not a defining consideration, a view that was received negatively by the market, despite the fact that Powell went on to elaborate that the FOMC looks at many considerations, including global issues, concerns about tariffs, the declining impact of the tax cut and financial market conditions more broadly. That clarification apparently fell on deaf ears.

Second, when questioned about the impact of the president’s recent tweets, Powell did not state that the president, like other citizens, has a right to his personal opinions. Rather, he issued the emphatic statement that the Fed was independent and would do what it felt needed to be done, free from political considerations. Clearly, the president’s tweets were not well received by the FOMC.

Third, Powell noted that the policy rate was at the low range of what the Committee viewed as neutral and that financial conditions continued to be accommodative in the context of a growing economy, strong labor markets, and an inflation outlook near the Committee’s target. He went on to try to dispel the view that two rate hikes were a given for 2019. He emphasized that the Committee would be driven totally by incoming data. Again, markets didn’t hear him.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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