In Jerome Powell’s first meeting as chair, the Federal Open Market Committee (FOMC) raised interest rates, marking its sixth hike for the expansion thus far. The decision itself wasn’t a surprise1 — the U.S. Federal Reserve (the Fed) has declared mission accomplished2 on the full employment component of its mandate, the global cycle has strengthened and inflation, while still running below the Fed’s 2% target, has shown some signs of firming in recent months. In the eyes of the FOMC, removing monetary policy support is just what the doctor ordered.
The bigger issues for markets coming into today’s meeting were:
- What, if anything, could be gleaned about Powell’s policy views and leadership style;
- The Fed’s guidance on the future path of interest rates (i.e., changes to the dot plot); and
- Insight into how seriously and when the Fed is considering revisions to its inflation target.
In this regard, yesterday’s outcome was hawkish. The 10-year U.S. Treasury yield moved up to 2.92% following the announcement and is hovering near its highest levels since early 2014. Meanwhile, the S&P 500® Index has been volatile but, on net, appears to be tracking slightly lower. Our key takeaways are that:
- The Fed’s guidance on the future path of interest rates shifted up. Whereas in December, there was a strong consensus on the FOMC for three rate increases in 2018, the Committee now appears torn between a three- and four-hike pace. Its rate forecasts for 2019, 2020 and the longer run all moved higher today.
- Consistent with these changes, Chair Powell noted that “the economic outlook has strengthened in recent months.â€
- More broadly, the Fed has now taken a tightening step at every quarterly press conference meeting dating back to December 2016 (fives hikes and the balance sheet normalization announcement). Historically, it has been common for the Fed to build a rhythm to its tightening cycles. After a slow start, it looks like gradual equates to roughly four tightenings per year in this expansion.
