Dec 21 2018

Trump: You Spoilt My Christmas, Powell !

So, the tweet does not seems to be working. Trump tweeted on Monday, earlier this week “it is incredible that the Fed is even considering yet another interest rate hike.” Powell also looks like a thick-skinned character. Despite the “warning”, he went ahead and hiked the interest rate. There is no denying of the fact Powell/FOMC took the decision to hike the rate in the best interest of their country.

Federal Reserve on last Wednesday raised its benchmark interest rate a quarter-point .The central bank took the target range for its benchmark funds rate to 2.25 % to 2.5 %. It marked the fourth increase this year and the ninth since it began normalizing rates in December 2015.

Fed, however, lowered its projections for future hikes.  Now, it is projected that there will be two hikes next year, which is a reduction but still ahead of current market pricing of no additional moves next year. The language in the post-meeting statement was not entirely dovish. The committee continued to include a statement that more rate hikes would be appropriate, though it did soften the tone a bit.

FOMC also lowered its outlook for the long-run funds rate, from 3 % in the September forecast to 2.8 %. The 2019 estimate declined to 2.9 % from 3.1 % and both 2020 and 2021 dropped to 3.1 % from 3.4 %. (Refer dot plot below, the left one indicating long run Fed funds rate in Sep-2018 whereas on the right is the current one in Dec- 2018).

           

Powell message was clear that when the Fed has reached the neutral target range, there is a need for greater caution and policy to become ever more data dependent. In the last two months, US 10 Year bond yield tested a high of 3.25% on 7 November and a low of 2.75% on 19 December and trades as 2.80 % at the time of writing. (Refer below graph indicating the same)

Bond yields are clearly indicating that most probably there will be no rate hike in the next due FOMC meet on 31 January 2019 so Trump, now can relax and enjoy his Christmas and New Year celebrations!