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Xinhua / Liu Jie via Getty Images
The chart looks set for further Fed rate hikes this year after the central bank chose Thursday to keep interest rates unchanged for the time being. According to the Federal Open Market Committee (FOMC), the economy continues to run on most cylinders, although the FOMC statement indicates that business investment has begun to moderate.
What is really at stake is the question of how the Fed could proceed next year, especially in the light of a US economy that continues to grow, even though many of them look like lukewarm. In general, the Fed's decision and statement indicate that the economy remains healthy and puts it in an ideal position to raise rates next month.
No surprise party today
Today's decision probably did not surprise many investors. In the run-up to this week's meeting, the federal funds futures market provided for a 7% rate hike. After Thursday's non-decision, the target range for the federal funds rate remains between 2% and 2.25%. This is the highest level since the Great Recession ten years ago, but barely in the range of 2% to 5% where the Fed has historically maintained its rates.
All eyes are on next month's meeting, which ends on December 19, just before the end of the year holiday season. Immediately after the non-decision on Thursday, federal fund futures fell slightly, indicating just under a 80% chance that rates will rise by at least 25 basis points by the end of the year. of the year. If the Fed were still up before 2019, it would be the fourth of the year and the ninth since the Fed started raising its zero rates in December 2015.
Although rates have risen steadily over the last three years, the economy has continued to grow. Inflation was hardly a factor in 2015 and reached the Fed's target of 2% (based on consumer spending prices, or PCE, in August). While this was happening in the United States, overseas economies, including China and Europe, have recently begun to show signs of slower growth.
This puts the Fed in a difficult position as it tries to prevent the overheating of the US economy, even as it is under pressure to not have a dollar value so high that It could harm foreign countries and prevent their consumers from affording US products. . Remember that the Fed has a dual mandate: stable prices and maximum employment. There are signs that a strong dollar, as well as recent trade battles, could hurt US business prospects.
The stock market, which had been evolving for most of the morning, did not seem to react immediately to the Fed's decision, but began to fall back about half an hour after the announcement of the news. This may partly reflect the Fed's rhetoric on moderating firm fixed investment (see below). In the Treasury, the 10-year benchmark yield edged up to 3.23%, just a few basis points lower than last month's high.
Policy factors
The Fed's statement Thursday has hardly changed since its last meeting in September. As in the past, the Fed said that "economic activity has risen at a steady pace" and that "job gains have been significant". He added that the unemployment rate had dropped and household spending "continued to grow strongly".
The only important change is business investment. This is the slowdown in this category in the third quarter gross domestic product (GDP) report released last month.
"The growth of business fixed investment has slowed from its rapid pace recorded earlier in the year," reads the statement from the Fed. Last September, the Fed said in its statement that the category had "significantly increased".
On inflation, the Fed's September forecast that price increases would remain close to its target of 2% over the next 12 months remained unchanged for both headline inflation and inflation. basis that excludes food and energy prices.
The Fed's statement follows another quarter of strong US economic growth, with gross domestic product up 3.5% in the third quarter. In addition, the unemployment rate stands at 3.7%, and wages rose by 3.1% in October. All of this data could argue, at least for some, for a continued Fed. Some analysts even expect four rate hikes next year. However, the average market estimate is 2.5 rate hikes in 2019, according to federal fund futures.
That said, some sectors are showing signs of slowing down. Many housing-related issues remain under pressure as rising mortgage rates and rising house prices could prevent some people from entering the real estate market. A number of large companies, including Apple and Amazon, presented quarterly vacation prospects that seemed to disappoint Wall Street. Many manufacturers of materials and industries have warned that the rising dollar and tariffs could put their business under pressure over the next year. The Fed probably pays special attention to all of this, and that will probably affect the policy to come in 2019.
In the third quarter, US business investment grew by 0.8% a year on average, the government said. This included a contraction in investment in commercial structures, which had been strong for months, thanks to spending on oil and gas platforms driven by rising energy prices, then reported the Wall. Street Journal. He added that some companies could reduce their investments because of tariff fears, while the United States and China continue to face trade policy. This remains a factor to watch and the Fed will monitor it closely.
A nod to recent volatility
The Fed's decision to keep its rates unchanged comes after a frantic run in October and early November that had driven the S & P 500 into correcting territory (down 10% from the highest) at times before stocks are rising again last week. The rising interest rate environment and worries about how high rates and the rising dollar could affect next year's results and the economic outlook may have contributed to a drag on equities last month. In addition, the slowdown came immediately after Fed Chairman Powell said in early October that the central bank was far from reaching a neutral rate environment.
This speech seemed to give the Fed a chance to stay rather hawkish in the short term, and might have been a blow to any bullish investor who was hoping for a break or at least a slowdown in 2019. Powell did not have a do not say at the time what "neutral" could mean, and analysts are everywhere on the map at a neutral level. The last "dot chart" of the Fed dating from late September shows that officials are organizing around a possible rise in rates ranging from just over 3% to the end of the year. Next year, from the current range of 2% to 2.25%, to reach around 3.6% at the end of 2020. would imply at least two to three further rate increases in 2019 after the fourth expected rate hike for 2018 next month.
Powell back on stage next week
On Wednesday afternoon, Mr. Powell will speak at a Dallas Fed event titled "Global Perspectives with Jerome Powell". Investors may want to consider following the "moderate conversation" of this Powell event with questions and answers. follows for more clues in his thinking, especially since no press conference is associated with the meeting today.
It can be argued that the Fed's decision removes another source of market volatility from the equation. Cboe's VIX, which is the most-watched "fear index", has been down since its short-term high of 26 at the end of October. However, it is hard to believe that the Fed meeting has played an important role in the recent unstable markets. It is more likely that volatility will continue in the weeks ahead of President Trump's meeting with Chinese President Xi, to be held later this month, where trade relations should be a topic of discussion. It can be argued that trade remains the main concern of investors, especially now that the US elections and the Fed meeting are out of the way. Part of Wednesday's post-election rally may have reflected investors' hopes that the split power structure to come into effect in Washington further encourages the administration to try to reach an agreement with China before next year when the composition of the Congress will be changed. about speculation.
One thing to consider regarding market reform in October, which took place despite what the Fed still considers a strong economy: sometimes there is a mismatch between what is happening with the government's economic numbers and the stock market because the numbers are turned to the past and the market is looking to the future. However, over time, the disconnect may become narrower, which may be the case now, as the market recovers, due to solid economic data.
FIGURE 1: YIELD AT 10 YEARS. After reaching a little less than 3.25% in early October, the 10-year yield has declined slightly to just over 3% given the volatility of October. After the election, the yield went back up. Data source: Cboe. Cartographic source: TD Ameritrade thinkorswim® platform. For illustration purposes only. Past performance does not guarantee future results.thinkorswim
Balancing Act: Prior to the 2007 financial crisis, the Fed maintained a balance sheet of about $ 870 billion. That reached $ 4.5 trillion by the end of 2014 as the central bank was trying to stimulate the economy with an extremely flexible monetary policy. It is slowly being normalized. But at a rate of $ 400 billion a year, it would take 10 years to return to the pre-crisis stage. This does not imply a recession, a global banking crisis, or any reason the Fed could have to increase the size of the portfolio assets. Does it matter? Some, including former Fed Chairman Ben Bernanke, claim that a larger balance sheet increases the amount of "safe" assets in the financial system. Others, however, fear that the Fed's intervention in markets such as government bonds and mortgage-backed securities, as it did during the QE period, may functioning of a private market, distort prices and designate "winners and losers".
Fed rate trajectory: Based on the futures market, traders seem pretty sure the Fed will raise rates in December, and they look pretty confident for another hike in March. Shortly after the announcement today, the futures market showed a 78% probability of an increase of at least 25 basis points in December and 60% probability of at least two similar increases in March. The last "plot" of the Fed, dating from September, suggests the possibility of two or three increases in total rates in 2019.
Musical chairs: The Fed's interest rate setting body, called the Federal Open Market Committee (FOMC), is not static. Of the 12-member committee, four positions are held by Fed presidents, who serve one-year terms, while the New York Fed chairman still gets a vote. (There are currently three vacant seats on the Fed's board of governors, which is expected to have seven votes, leaving the current FOMC with only nine voting members.) This year's outgoing presidents are Thomas Barkin of Richmond , Raphael Bostic of Atlanta, Mary Daly of San Francisco and Cleveland is Loretta Mester. They will be replaced by Charles Evans of Chicago, Esther George of Kansas City, Eric Rosengren of Boston and James Bullard of St. Louis. The new presidents are split evenly over their monetary policy views, with Evans and Bullard being considered dovish and Rosengren and George considered hawks. Meanwhile, Richard Clarida is a new vice-chair of the board of governors. Congress did not confirm the three candidates of President Trump for vacancies on the board. We will have to wait to see if the new composition of the FOMC, once everything is said and done, will make the committee more hawkish or more accommodating, or leave its overall position unchanged.
Comment TD Ameritrade® for educational purposes only. ISPC Member.
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Xinhua / Liu Jie via Getty Images
The chart looks set for further Fed rate hikes this year after the central bank chose Thursday to keep interest rates unchanged for the time being. According to the Federal Open Market Committee (FOMC), the economy continues to run on most cylinders, although the FOMC statement indicates that business investment has begun to moderate.
What is really at stake is the question of how the Fed could proceed next year, especially in the light of a US economy that continues to grow, even though many of them look like lukewarm. In general, the Fed's decision and statement indicate that the economy remains healthy and puts it in an ideal position to raise rates next month.
No surprise party today
Today's decision probably did not surprise many investors. In the run-up to this week's meeting, the federal funds futures market provided for a 7% rate hike. After Thursday's non-decision, the target range for the federal funds rate remains between 2% and 2.25%. This is the highest level since the Great Recession ten years ago, but barely in the range of 2% to 5% where the Fed has historically maintained its rates.
All eyes are on next month's meeting, which ends on December 19, just before the end of the year holiday season. Immediately after the non-decision on Thursday, federal fund futures fell slightly, indicating just under a 80% chance that rates will rise by at least 25 basis points by the end of the year. of the year. If the Fed were still up before 2019, it would be the fourth of the year and the ninth since the Fed started raising its zero rates in December 2015.
Although rates have risen steadily over the last three years, the economy has continued to grow. Inflation was hardly a factor in 2015 and reached the Fed's target of 2% (based on consumer spending prices, or PCE, in August). While this was happening in the United States, overseas economies, including China and Europe, have recently begun to show signs of slower growth.
This puts the Fed in a difficult position as it tries to prevent the overheating of the US economy, even as it is under pressure to not have a dollar value so high that It could harm foreign countries and prevent their consumers from affording US products. . Remember that the Fed has a dual mandate: stable prices and maximum employment. There are signs that a strong dollar, as well as recent trade battles, could hurt US business prospects.
The stock market, which had been evolving for most of the morning, did not seem to react immediately to the Fed's decision, but began to fall back about half an hour after the announcement of the news. This may partly reflect the Fed's rhetoric on moderating firm fixed investment (see below). In the Treasury, the 10-year benchmark yield edged up to 3.23%, just a few basis points lower than last month's high.
Policy factors
The Fed's statement Thursday has hardly changed since its last meeting in September. As in the past, the Fed said that "economic activity has risen at a steady pace" and that "job gains have been significant". He added that the unemployment rate had dropped and household spending "continued to grow strongly".
The only important change is business investment. This is the slowdown in this category in the third quarter gross domestic product (GDP) report released last month.
"The growth of business fixed investment has slowed from its rapid pace recorded earlier in the year," reads the statement from the Fed. Last September, the Fed said in its statement that the category had "significantly increased".
On inflation, the Fed's September forecast that price increases would remain close to its target of 2% over the next 12 months remained unchanged for both headline inflation and inflation. basis that excludes food and energy prices.
The Fed's statement follows another quarter of strong US economic growth, with gross domestic product up 3.5% in the third quarter. In addition, the unemployment rate stands at 3.7%, and wages rose by 3.1% in October. All of this data could argue, at least for some, for a continued Fed. Some analysts even expect four rate hikes next year. However, the average market estimate is 2.5 rate hikes in 2019, according to federal fund futures.
That said, some sectors are showing signs of slowing down. Many housing-related issues remain under pressure as rising mortgage rates and rising house prices could prevent some people from entering the real estate market. A number of large companies, including Apple and Amazon, presented quarterly vacation prospects that seemed to disappoint Wall Street. Many manufacturers of materials and industries have warned that the rising dollar and tariffs could put their business under pressure over the next year. The Fed probably pays special attention to all of this, and that will probably affect the policy to come in 2019.
In the third quarter, US business investment grew by 0.8% a year on average, the government said. This included a contraction in investment in commercial structures, which had been strong for months, thanks to spending on oil and gas platforms driven by rising energy prices, then reported the Wall. Street Journal. He added that some companies could reduce their investments because of tariff fears, while the United States and China continue to face trade policy. This remains a factor to watch and the Fed will monitor it closely.
A nod to recent volatility
The Fed's decision to keep its rates unchanged comes after a frantic run in October and early November that had driven the S & P 500 into correcting territory (down 10% from the highest) at times before stocks are rising again last week. The rising interest rate environment and worries about how high rates and the rising dollar could affect next year's results and the economic outlook may have contributed to a drag on equities last month. In addition, the slowdown came immediately after Fed Chairman Powell said in early October that the central bank was far from reaching a neutral rate environment.
This speech seemed to give the Fed a chance to stay rather hawkish in the short term, and might have been a blow to any bullish investor who was hoping for a break or at least a slowdown in 2019. Powell did not have a do not say at the time what "neutral" could mean, and analysts are everywhere on the map at a neutral level. The last "dot chart" of the Fed dating from late September shows that officials are organizing around a possible rise in rates ranging from just over 3% to the end of the year. Next year, from the current range of 2% to 2.25%, to reach around 3.6% at the end of 2020. would imply at least two to three further rate increases in 2019 after the fourth expected rate hike for 2018 next month.
Powell back on stage next week
On Wednesday afternoon, Mr. Powell will speak at a Dallas Fed event titled "Global Perspectives with Jerome Powell". Investors may want to consider following the "moderate conversation" of this Powell event with questions and answers. follows for more clues in his thinking, especially since no press conference is associated with the meeting today.
It can be argued that the Fed's decision removes another source of market volatility from the equation. Cboe's VIX, which is the most-watched "fear index", has been down since its short-term high of 26 at the end of October. However, it is hard to believe that the Fed meeting has played an important role in the recent unstable markets. It is more likely that volatility will continue in the weeks ahead of President Trump's meeting with Chinese President Xi, to be held later this month, where trade relations should be a topic of discussion. It can be argued that trade remains the main concern of investors, especially now that the US elections and the Fed meeting are out of the way. Part of Wednesday's post-election rally may have reflected investors' hopes that the split power structure to come into effect in Washington further encourages the administration to try to reach an agreement with China before next year when the composition of the Congress will be changed. about speculation.
One thing to consider regarding market reform in October, which took place despite what the Fed still considers a strong economy: sometimes there is a mismatch between what is happening with the government's economic numbers and the stock market because the numbers are turned to the past and the market is looking to the future. However, over time, the disconnect may become narrower, which may be the case now, as the market recovers, due to solid economic data.
FIGURE 1: YIELD AT 10 YEARS. After reaching a little less than 3.25% in early October, the 10-year yield has declined slightly to just over 3% given the volatility of October. After the election, the yield went back up. Data source: Cboe. Cartographic source: TD Ameritrade thinkorswim® platform. For illustration purposes only. Past performance does not guarantee future results.thinkorswim
Balancing Act: Prior to the 2007 financial crisis, the Fed maintained a balance sheet of about $ 870 billion. That reached $ 4.5 trillion by the end of 2014 as the central bank was trying to stimulate the economy with an extremely flexible monetary policy. It is slowly being normalized. But at a rate of $ 400 billion a year, it would take 10 years to return to the pre-crisis stage. This does not imply a recession, a global banking crisis, or any reason the Fed could have to increase the size of the portfolio assets. Does it matter? Some, including former Fed Chairman Ben Bernanke, claim that a larger balance sheet increases the amount of "safe" assets in the financial system. Others, however, fear that the Fed's intervention in markets such as government bonds and mortgage-backed securities, as it did during the QE period, may functioning of a private market, distort prices and designate "winners and losers".
Fed rate trajectory: Based on the futures market, traders seem pretty sure the Fed will raise rates in December, and they look pretty confident for another hike in March. Shortly after the announcement today, the futures market showed a 78% probability of an increase of at least 25 basis points in December and 60% probability of at least two similar increases in March. The last "plot" of the Fed, dating from September, suggests the possibility of two or three increases in total rates in 2019.
Musical chairs: The Fed's interest rate setting body, called the Federal Open Market Committee (FOMC), is not static. Of the 12-member committee, four positions are held by Fed presidents, who serve one-year terms, while the New York Fed chairman still gets a vote. (There are currently three vacant seats on the Fed's board of governors, which is expected to have seven votes, leaving the current FOMC with only nine voting members.) This year's outgoing presidents are Thomas Barkin of Richmond , Raphael Bostic of Atlanta, Mary Daly of San Francisco and Cleveland is Loretta Mester. They will be replaced by Charles Evans of Chicago, Esther George of Kansas City, Eric Rosengren of Boston and James Bullard of St. Louis. The new presidents are split evenly over their monetary policy views, with Evans and Bullard being considered dovish and Rosengren and George considered hawks. Meanwhile, Richard Clarida is a new vice-chair of the board of governors. Congress did not confirm the three candidates of President Trump for vacancies on the board. We will have to wait to see if the new composition of the FOMC, once everything is said and done, will make the committee more hawkish or more accommodating, or leave its overall position unchanged.
Comment TD Ameritrade® for educational purposes only. ISPC Member.
