Fed: One and not yet done
Yes, the Federal Reserve raised rates today, moving the fed funds target range from 2-2.25% to a new range of 2.25-2.5% at its policy-setting meeting. But the story of the meeting was not today’s action, rather what the future might hold for monetary policy. The materials accompanying the announcement of the policy action were less optimistic than they were in September, reflecting not only softer economic growth and lower inflation, but also the prospect of fewer rate hikes. The Fed’s projections for the policy rate for 2019 and beyond were lowered, with the median dot for 2019 reflecting expectations of two tightenings rather than three over the course of the year. During his press conference Chair Powell acknowledged that “crosscurrents” had emerged since the last dot projections and that market volatility was at least one factor behind the lower overall projections. Powell also cited a moderation in global growth and tighter financial conditions since September.
Our outlook for 2019 is for two rate hikes, as well, with the timing of those hikes being less certain as the Fed moves away from quarterly press conferences to one at every meeting. Powell characterized the Fed’s balance sheet policy as being on autopilot, a label that seemed to disappoint the broader financial markets. At today’s meeting the Fed also made another 5 basis point technical adjustment to the manner in which they implement monetary policy, by narrowing the spread between the interest rate that the Fed pays on excess reserves (IOER) and what is paid on the New York Fed’s reverse repo facility (RRP). After today’s action IOER stands at 2.40%, 10 basis points below the upper bound of the fed funds target range, and the rate on RRP at 2.25%, the lower bound of the range. Today’s technical adjustment further enhances the’s ability to maintain a fed funds target rate within the established range, and will likely lead to softer repo rates as a result.