Updated: 06-20-2018

There will be much ado about the Federal Open Market Committee (FOMC) having a more hawkish-minded outlook based on the changes in the policy directive and projection materials that followed the June meeting.

Here is a sampling of why that perspective was hatched in the market's mind:

  • The so-called "dot plot" showed a prevailing expectation for four rate hikes in total this year, versus the projection for three rate hikes at the time of the March meeting
  • The directive omitted the prior view that the FOMC thinks the fed funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run
  • The fed funds rate projections for 2019 (3.1%) and 2020 (3.4%) are above the longer run expectation of 2.9%
  • There was no specific reference in the directive to any concern about protectionist trade matters
  • The June directive qualified that economic activity has been rising at a solid rate as opposed to a prior characterization that it has been rising at a moderate rate; and
  • The policy decision was unanimous

The larger point Fed Chair Powell aimed to impress on the market at his press conference -- and rightfully so -- is that the decision to raise the target range for the fed funds rate is another sign that the US. economy is in great shape.

In other words, he implied in less direct terms that everyone should "chill out" about the rate hike, and the view that more rate hikes are likely, because they are a natural offshoot of improving economic conditions.

That improvement is good for employment; it's good for corporate earnings; and it should be good for wages.

The stock market, however, is a little more self-serving and has been left to wonder at what point rising interest rates will no longer be good for it. That's why the "good news" of a rate hike hasn't necessarily translated into big gains for the stock market, which has been climbing a wall of rate-hike worry this year.

Rising interest rates have not led the stock market to a breaking point yet. It has bent at times, but it hasn't broken.

The S&P 500 is up 3.8% for the year (before dividends) after the FOMC has increased the target range for the fed funds rate twice since December and after the yield on the benchmark 10-yr note has risen 55 basis points since the end of last year.

Mr. Powell conducted his press conference in the most pragmatic manner, speaking in a clear, easy-to-understand way that oftentimes eluded his predecessors in the post-Volcker era.

Fittingly, he began his press conference saying there will be a press conference now after every meeting, starting in January, noting that policy outcomes are apt to be better when the Federal Reserve is as clear as possible about what it is doing and why. The increased frequency of the press conferences, he added, should not be construed as a signal of future rate hike changes.

Another important clarification is that the Federal Reserve thinks it is very important inflation remains anchored at 2.0%, but that the Federal Reserve won't overreact when inflation goes above 2.0%, which it is likely to do from time to time.

The latter seemingly suggests the Federal Reserve will have some tolerance for an overshoot of its inflation target. That could be spun as a dovish takeaway, yet the understanding that there has been an increase in the median estimate for the number of rate hikes this year, and that the fed funds rate projections for 2019 and 2020 are above the Federal Reserve's longer-run expectation of 2.9%, mitigated that impression of things in the immediate wake of the press conference.

Mr. Powell steered clear of weighing in on trade matters, stating they are not the purview of the Federal Reserve. What he did say is that concerns about trade policy are rising in the private sector, but that there is nothing showing up in the data yet to suggest those concerns are having any impact on economic activity.

Separately, he acknowledged that Federal Reserve members generally believe the changes in fiscal policy will provide meaningful support to demand over the next three years and that there is an expectation that policy changes for the supply side should drive increased productivity and higher output.

By and large, though, he stuck to the party line that the Federal Reserve's aim with its policy is to fulfill its Congressional mandate to achieve the goals of maximum sustainable employment and stable prices.

There has been undeniable progress in pursuit of those goals and the rate hike at the June meeting is a testament to that progress.

It is a rate hike based on good news for the economy. That isn't translating unequivocally, however, into good news for the stock market, which sees good news for the economy as a ticket to higher rates and multiple compression.

--Patrick J. O'Hare, Briefing.com

Copyright © 2008 Briefing.com, Inc. All rights reserved.
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