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The Fed raises rates and slightly lowers the path of future increases. This is Greg Ip, the Journal’s chief economics commentator, to bring you the details and analysis.
POWELL FOLLOWS THE DATA, NOT THE MARKET
The Fed tightened by the expected quarter of a point, to between 2.25% and 2.5%, while projecting two instead of three more increases next year. This qualifies as a “dovish” hike–barely. It’s not a pause: The Fed has signaled flexibility on how fast rates go up, but not whether they go up. The Fed still “judges that some further gradual increases” are coming, slightly less hawkish than in November when it “expect[ed] … further gradual increases.” Fed Chairman Jerome Powell is not trained as an economist, but this shows he makes monetary policy as his economist predecessors did: based on the economic data, which is solid, not on markets, which are turning pessimistic and badly want a pause.
THE FED DISAPPOINTS MARKETS
The markets were hoping for no rate hike, or a dovish rate hike, i.e., one accompanied by a strong hint that this could be the last. That didn’t come, and stocks sold off. The Dow Jones Industrial Average, up about 300 points just before the Fed’s 2 p.m. announcement, plunged into negative territory and closed down about 350 points. Bond yields initially ticked higher then fell, a relatively pessimistic assessment on where the economy is headed now. At publication time, President Trump had not commented.
FOUR MORE OFFICIALS SEE AT MOST 2 HIKES IN 2019
The Fed’s projections showed 11 of 17 officials expect the Fed will raise rates no more than two times next year, down from seven of 16 officials in September. Just six officials expect three or more hikes, down from nine. Officials penciled in one more rate increase in 2020. Their median projection of the neutral interest rate—a level that neither spurs nor slows growth—edged down to 2.75% from 3%. The Fed is now one quarter point increase away from that. Overall, Fed officials appear less convinced rates need to rise beyond neutral, i.e., turn restrictive, to cool the economy, Nick Timiraos reports. The changes reflect the recent market pullback that has made financial conditions for businesses and consumers tighter, which obviates the need for as many rate increases. Officials lowered their growth projection for next year to 2.3% from 2.5%.
WHAT POWELL SAID
Excerpts from Mr. Powell’s press conference:
“Cross currents have emerged. Overall financial conditions have tightened… [but] have not fundamentally altered the outlook. When the economy has performed as expected the committee has generally moved in line with the median projection” for interest rates.
“We’ve reached the bottom end of the range of committee estimates of what might be neutral [interest rates]. Going forward we’ll let the data inform the outlook and what might be appropriate monetary policy … We’re always data dependent but it has particular meaning in this context.”
“I’m not worried [about President Trump’s comments] because I know everyone at the Fed is going to do their job. We at the Fed are absolutely committed to [our] mission and nothing will deter us from doing what we think is the right thing to do.”
“Inflation has continued to surprise to the downside, not by a lot. We have not declared victory” on stabilizing inflation around the Fed’s symmetric 2% target.
WHAT ECONOMISTS ARE SAYING
Capital Economics: “With the vote unanimous and the median rate projection for end-2019 revised down by only 20bp, this is hardly the ‘dovish hike’ that some were anticipating.”
Morgan Stanley: “A bit confusing, the longer-run dot came down from 3% to 2.75% such that even though the entire path for rates shifted lower in the out years, the amount of restrictive policy the Committee believes is needed remains unchanged.”
RELATED
Fed Raises Rates, but Signals Slightly Milder Path of Future Increases
Live Analysis of the Fed’s Interest-Rate Decision
Parsing the Fed: How the December Statement Changed From November
from Real Time Economics https://ift.tt/2V4A48i
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