Updated: 01-15-2019

The deed is done. The Federal Open Market Committee (FOMC) raised the target range for the fed funds rate for the fourth time this year by 25 basis points to 2.25% to 2.50%. It was the rate hike most people saw coming. The problem is that it wasn't the "dovish hike" everyone had been hoping to see.

A "dovish hike" is a bit of a silly construct. Interest rates going up are not dovish, yet the stock market tried to convince itself that it could be rally material if the Fed raised rates at the December 18-19 FOMC meeting and then:

  • Published economic growth projections that are more conservative than before
  • Released a dot-plot that shows a projection for fewer than three rate hikes in 2019; and
  • Offered a message that implies the Fed isn't going to be in a hurry to raise the fed funds rate again

The FOMC and Fed Chair Powell, however, didn't give the market everything it was hoping for.

  • Its median economic projections were a bit more conservative than what was provided after the September FOMC meeting, but only barely so, which didn't connote any great concern about the economic outlook.
  • The so-called dot plot showed a modest downgrade in the rate-hike projections for 2019 from three rate hikes to two rate hikes. That was not altogether surprising (it would have been a real leap for the Fed to go to one rate hike or none); however, it looks hawkish still relative to the fed funds futures market, which isn't expecting any rate hikes in 2019.
  • The directive contained the view that the Committee judged that some further gradual increases in the target range for the fed funds rate will be consistent with sustained expansion of economic activity. The market had been hopeful that the language surrounding any "further gradual increases" would be removed; and
  • It was revealed that the Fed will continue its quantitative tightening effort at $50 billion per month.

Fed Chairman Powell didn't necessarily calm the market's angst at his press conference either.

Mr. Powell acknowledged that monetary policy does not need to be accommodative now and that he doesn't believe current policy is restrictive. He also doesn't see the Fed altering its approach to balance sheet normalization since the Fed prefers the use of the fed funds rate to be its main policy method.

Not surprisingly, the stock market felt Mr. Powell came up short of its hopeful expectations. That has become a real sticking point for the stock market, too.

Fed Chair Powell isn't bending to the stock market's volatile whims like Fed Chair Bernanke and Fed Chair Yellen seemed to do during their time at the helm of the Fed.

It is an uncomfortable position for the stock market to be in after getting its monetary policy wishes for the better part of the past ten years. That discomfort is manifesting itself in heightened volatility and lower stock prices.

Mr. Powell certainly isn't bending to the wishes of President Trump either, which hopefully won't be a problem in terms of protecting the Fed's independence from politics. Suffice it to say, though, if the president wasn't happy with previous rate hikes, he won't be happy with the latest rate hike and the median projection that two more rate hikes might be necessary in 2019.

Then again, those rate hikes might not be necessary.

Fed Chair Powell stressed the Fed's data dependency and observed that 2019 might not be as kind to the Fed's forecasts as 2018 was since growth is moderating, financial conditions have gotten tighter, and monetary policy will be providing a smaller boost than it did in 2018.

Depending on the data, Mr. Powell said, naturally creates a high degree of uncertainty surrounding the path of interest rates. That's another way of saying no one can predict the future with complete certainty and that the Fed is going to adapt its policy in accordance with what the data are telling it.

Some would argue that's hogwash based on the latest decision to raise the target range for the fed funds rate when inflation is undershooting the Fed's own forecast. Such views are what make a market, but what the market seems to be making of Fed policy now is that it is raising the risk of a policy mistake that hurts growth and earnings prospects.

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

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