Rate Outlook Intact as Fed Becomes More Cautious

The Fed is giving a nod to some of the uncertainty regarding the economy and the effects of future hikes and is leaving the door open to slow down future rate increases

Eric Compton 20 December, 2018 | 10:10AM
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Eric Compton: The Fed met expectations Wednesday by raising its target rate range, now 2.25% to 2.5%. But markets were still roiled as investors fretted about economic growth and how dovish the central bank is really going to be next year.

Overall, Morningstar's long-term rate projection remains intact, where we expect a normalized policy rate of roughly 2.75% to be reached in the next couple of years.

The vote was unanimous this week; however, there was again a slight change in the language of the release as well as a more dovish looking dot plot. The Fed's statement maintained its language that further hikes would be gradual and that the risk outlook remains roughly balanced.

This, combined with additional new language about continuing to monitor global economic and financial developments, leads us to conclude the Fed is giving a nod to some of the uncertainty regarding the economy and the effects of future hikes and is leaving the door open to slow down future rate increases.

The 2019 median projected rate is now 2.9%, down from the 3.1% rate given at the September meeting, and the longer run median rate is now projected at 2.8%, down from 3.0%.

CME futures data further reflects this shift and is in fact even more dovish than the Fed, with the highest probability given to zero rate hikes in 2019.

 

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Eric Compton  is an Equity Analyst, Financial Services - Regional Banks, for Morningstar

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