Fed Rate Hike Dec 2018

On what’s said to be the final big event for the year that is market moving, the Federal Reserve on Wednesday raised its benchmark interest rate a quarter-point but lowered its projections for future hikes. Heading into the announcement, many analysts had expected a "dovish" interest rate increase paired with strong verbal cues that the central bank would not tighten excessively in a period when global stocks have retreated amid concerns over slowing growth and trade wars. However, the Fed and Chairman Jay Powell did not go far enough to assuage markets. As markets had expected, the central bank took the target range for its benchmark funds rate to 2.25 percent to 2.5 percent. The move marked the fourth increase this year and the ninth since it began normalizing rates in December 2015. Officials, though, now project two hikes next year, which is a reduction but still ahead of current market pricing of no additional moves next year.

As Trump views the condition of the stock market as the symbol of success of his policies and the health of the country, a rate hike has resulted in a fall in the S&P500. Reports suggested that the S&P 500 had its worst reaction to Fed rate rise since 1994, which triggered President Donald Trump’s tweet that “ it is incredible how the fed is considering yet another interest rate hike”. Further reports suggested that Trump was look to replace Jerome Powell from his post due to uncoherent monetary policy strategy.

It was surprising however, that how the Fed did not talk much about the financial, economic and political developments across the world, in fact saying that risks surrounding the economy are roughly balanced. This was contrary to how other independent central banks viewed their policy stance. The ECB for instance came out saying that the risks were roughly balanced however, there were some signs of potential downside risks. The Japanese central bank also kept its base interest rates unchanged as the world continues to account for increased instability both geo-politically and economically, especially as equity markets have been under pressure and oil has been collapsing.

A few economists even suggested that quantitative tightening combined with a weakening economy might be the balance that tips us into what the inversion has suggested that a recession could be coming. The question arises that “has the Fed has been a little too strict here in not responding to outside economic developments?”

We can also see from the initial sell off gold had with the first few interest rate hikes, the last few rate hikes have had an opposite effect on the gold which could be a good indication for falling investor sentiment for the dollar. "While this was a dovish hike from the stance that the Fed was in before, this is somewhat not as dovish as many participants probably wanted," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "It would have been a difficult move for the Fed to completely remove some of the 2019 hike expectations, but I think they're making the message clear that they're going to remain more data dependent as we go into 2019."