As was widely expected, the Fed Open Market Committee (FOMC) hiked its short-term interest rate range from 1.25%-1.50% to 1.50%-1.75% yesterday. This was the first Fed policy meeting under the direction of new Fed Chairman Jerome “Jay” Powell (shown below) who recently replaced former Fed Chair Janet Yellen.
The open question is whether the FOMC will raise the Fed Funds rate two or three more times this year. In late 2017 and earlier this year, the Fed indicated that it would raise the key short-term rate three times this year.
Yet in congressional testimony leading up to his confirmation, Mr. Powell indicated that the US economy is strengthening and suggested that there could be a total of four rate hikes this year instead of three. Let’s see if yesterday’s policy statement offers any clues.
The statement began by pointing out that the labor market has continued to tighten and the economy has strengthened since the last FOMC meeting in January. As a result, the Committee voted to raise the key Fed Funds rate target to 1.50%-1.75% as most everyone expected. The vote was unanimous.
As noted above, there was concern going into this meeting that the policy statement might refer to four rate hikes this year, but it did not. Therefore, most Fed-watchers assumed that the FOMC is content with only three rate hikes this year and three in 2019 as well.
If that is the case, the Fed Funds rate range would be at 2.75%-3.0% by the end of 2019. Some Fed-watchers doubt that the FOMC will actually raise rates that much next year. What is clear is that a lot can change later this year and next year, and the Fed will react accordingly.
The FOMC updated its projections for the economy, the unemployment rate and inflation. The Committee revised its estimate of 2018 GDP growth from 2.5% to 2.7%, and for 2019 from 2.1% to 2.4%. The Fed sees the unemployment rate falling to 3.8% in 2018 and 3.6% in 2019, from 4.1% currently. The Fed’s estimate of inflation, as measured by the Personal Consumption Expenditures Index, was unchanged at 1.9% for 2018 and 2.0% for 2019.
Following the release of the policy statement, Chairman Powell held his first press conference. I thought he came across as very confident and well-spoken. He seemed very comfortable answering questions from the media.
When asked specifically about the odds of four rate hikes this year, he responded that it will all depend on how strong the economy is. At present, the Committee is comfortable with three rate hikes this year, but that could change either way, he said.
Stocks and bonds had mixed reactions when the policy statement was initially released, but both markets then moved decidedly lower from their highs earlier in the day. Stocks are sharply lower again today. President Trump’s tariffs are set to go into effect tomorrow. Markets don’t like tariffs.
Government Shutdown Looms on Friday
Facing a deadline at midnight this Friday and a possible government shutdown, lawmakers in Congress toiled on Monday, Tuesday and Wednesday trying to finish a huge $1.3 trillion bill to fund the government through September 30. As usual, this bill is jammed with wasteful spending by Democrats and Republicans. It passed the House earlier today.
Complicating matters this time around are efforts by some congressional members to insert certain gun-control measures in the bill, others who want to expand gunowners’ rights to carry concealed weapons across state lines and, of course, President Trump’s insistence that the spending bill include at least preliminary funding for his border wall – just to name a few.
If lawmakers can’t reach a deal, and one that President Trump will sign, by midnight on Friday, then non-essential government services will shut down and will not reopen on Monday, unless a bill is passed over the weekend.
The other option is that lawmakers pass another short-term spending bill, their sixth of the last year, to extend the funding deadline through sometime next week. That’s complicated, however, because lawmakers are scheduled to adjourn by this Saturday at the latest for a two-week “spring break.” It will be interesting to see if members delay their vacation if a funding bill is not passed.
If something doesn’t happen before the markets open on Monday, we could be looking at another very volatile week on Wall Street.