The Markets vs. the Fed, Who Will Be Right?
December 26, 2018
By Krista Biernbaum, CFP®• Securities Analyst II
All eyes were on the Federal Reserve last week! Recent commentaries on the Fed from my colleagues, particularly from Michael List last week, prepared us for this policy meeting. It was the last and most important one of 2018. Let’s digest what happened.
Federal Reserve Raises the Federal Fund Rate
At the last policy meeting of the year, the Federal Reserve raised the federal funds rate, the rate banks charge each other for overnight loans, another 0.25%. This marks the fourth rate increase of 2018 and the ninth in the current rate hike cycle. Even though the stock market is having a negative and volatile quarter, this rate increase was expected.
Following the policy meeting, the Fed released updated economic and interest rate projections. This is what investors were anxious to see. As most anticipated, the Fed lowered its interest rate projections across the board. However, they weren’t lowered as much as investors had hoped. Investors were hoping the Fed would signal a pause or a wait and see approach. The markets wanted more from the Fed! Unfortunately, they didn’t get it.
The Market and Fed are at Odds
With these updated projections, the markets and the Fed are at odds. The Fed is saying it will raise interest rates twice in 2019 and once in 2020. The markets paint a different picture. Below are two charts from the Wall Street Journal’s Daily Shot® that illustrate what the markets think. For 2019, the market-implied federal funds rate currently shows just a 0.12% increase. This is less than one rate increase next year! In addition to this, the second chart shows the Fed will have to start cutting rates in 2020.
Who Will Win?
With such differing views, who will win? Only time will tell if the Fed’s views start to converge to the markets or vice versa. In the meantime, what we do know is that economic growth is still positive. Both sides can agree on this. The theme for the global economy going forward is slowing and diverging growth, but still positive nonetheless. Keep in mind that a slowdown does not mean recession.
As we approach the end of the year, I think investors are just looking forward to putting 2018 behind them and starting fresh in the New Year. Given a positive economic environment, reasonable valuations, and a data dependent Fed, 2019 could shape up to be a positive year for the markets.
I hope everyone has a Happy New Year! As always, feel free to give us a call if you have any questions.