Treasury Inflation Forecasts Continue Falling After Fed Rate Hike

In fact, the Federal Reserve trimmed its outlook for GDP growth for this year and in 2019. Yesterday’s revised estimates see output for all of 2018 rising 3.0%, down from a 3.1% forecast in September. The Fed also cut its 2019 growth outlook to 2.3% from the previous 2.5% estimate.

The sharp decline in the US stock market following the Fed announcement adds to the sense that market expectations are now discounting a weaker macro trend. The S&P 500 Index fell 1.5% yesterday, dropping to a 15-month low.

Apparently factoring in the weaker economic expectations, Powell hinted that the Fed’s rate hikes will slow or perhaps end next year. “There’s significant uncertainty about both the path and the ultimate destination of any further rate increases,’’ he said at yesterday’s press conference.

Tim Duy, an economist at the University of Oregon who follows Fed policy closely, worries that that the central bank “is currently a slave to its own models” and so it’s at risk of falling short of its inflation target. 

It is an unnecessarily and explicit hawkish message that is an artifact of a communications strategy that only made sense when you could reasonably promise zero rates for an extended period. It makes no sense to create the impression of a promise to continue to raise interest rates at a mature point in the business cycle when growth is already slowing.

The jury is still out on whether the the Fed’s latest rate hike (or any future hikes) are a clear policy mistake, but the risk on that front is rising.

“In a risk management framework, the Fed would have been wise to skip this meeting and put January in play,” Duy notes. “By not doing so, I fear the Fed may flip uncomfortably close to my alternative scenario – that they continue hiking until something breaks.”

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