What We Learned From the Feds Last Week: A Rate Increase and So Much More
October 3, 2018
By Krista Biernbaum, CFP®
Securities Analyst II
All eyes were on the Federal Reserve last week as it met for its Federal Open Market Committee (FOMC) meeting. Leading up to it, there was more than a 90 percent probability that we would see a rate increase. As expected, the Fed raised rates for the third time this year. Following the conclusion of its two-day meeting, the Fed released its post-meeting statement, the committee updated economic and interest rate projections and Fed Chairman Jerome Powell held a press conference.
Let’s digest what happened:
Raising the Federal Funds Rate
After starting at zero, the Fed started raising the federal funds rate — the rate banks charge each other for overnight loans — back in December 2015. It has continued to raise rates gradually as it continues on its path toward normalizing monetary policy. Last week’s rate increase marked the eighth quarter-percent increase thus far. The infamous “dot plot”, which illustrates where Fed members sees rates over the near and longer term, shows the Fed is still forecasting one more rate increase in 2018. It currently sees three rate increases in 2019 and one in 2020.
The Fed's Economic Projections
Each FOMC meeting concludes with the release of the Fed’s statement outlining its views and action steps. This became shorter and more precise as Jerome Powell took over as Fed Chairman earlier this year. There was not much change in last week’s statement from the prior one. The biggest change was the removal of the word “accommodative” when referencing monetary policy. What does this mean? It signals the Fed is close to or at a neutral stance on monetary policy.
The Fed also released its updated economic projections; these are shown in the below chart:
It illustrates what policy members are forecasting for U.S. economic growth, the unemployment rate, and inflation. The chart compares June’s forecast to September’s. The highlighted numbers changed from June. The Fed still believes the U.S. economy is strong as it now sees GDP for 2018 reaching 3.1 percent. U.S. economic growth will peak this year, the unemployment rate is close to bottoming out and inflation will not get much higher than 2 percent (per the Fed’s median projections).
What does this mean going forward? It is likely that we will see one more rate increase in 2018 from the Fed, probably in December. The markets currently agree with this; the fed funds futures showed close to an 80 percent probability after the Fed’s meeting. Where rates go from there is not as certain. However, what is more certain is the U.S. economy is still positive, corporate earnings have been strong this year and inflation is not likely to get much higher than current levels. This means the Fed will continue to raise rates gradually. This will create opportunities to increase current income in the fixed income portion of portfolios — however those opportunities will be dramatic and will not appear immediately.
Want to Learn More?
As we enter the final quarter of 2018, this is an excellent time to review your financial plan and begin planning for your cash flow needs at year end and for next year. Contact an advisor today if you'd like to talk more about the Federal Reserve, discuss how the recent rate increase may affect your portfolio or review your financial plan.