In its first meeting since Octobers market turmoil and this weeks midterm elections, the Federal Reserve voted to maintain the current level of its benchmark interest rate.
The policymaking Federal Open Market Committee, as expected, unanimously approved keeping the federal funds rate in a range of 2 percent to 2.25 percent. Markets figured the central bank would hold the line at this meeting and probably approve a quarter-point hike in December, which would be the fourth of the year.
Federal Reserve officials are expected to keep interest rates steady at their two-day policy meeting that concludes Thursday. They will likely discuss the economy, financial markets and the future path of rates, among other topics.
On the upside, the committee noted that the unemployment rate “has declined” since the September meeting. The Labor Department last week reported that the headline jobless level was at 3.7 percent, the lowest since December 1969.
The Dow Jones Industrial Average fell over 50 points in pre-market trading as investors awaited news from todays U.S. Federal Reserve meeting on interest rates. Markets largely ignored this mornings announcement that Americans seeking unemployment benefits came in at 214,000, a figure that was in line with economists expectations. The Dow Jones surged more than 445 points yesterday after the Democrats secured the U.S. House of Representatives during the midterm elections.
Dow Jones Industrial Average Falls 50 Points Ahead of Federal Reserve Rate Decision
However, the statement noted that the “growth of business fixed investment has moderated from its rapid pace earlier in the year.”
Now, heres a closer look at todays Money Morning insight, the most important market events, and stocks to watch.
There was no detail or data given for why officials see investment declining, though companies reported during third-quarter earnings season that some of their investment plans have been curtailed due to the ongoing trade war between the U.S. and China.
The economy otherwise has been humming along strongly, and the FOMC reiterated its belief that “economic activity has been rising at a strong rate.” GDP growth this year has averaged 3.3 percent for the first three quarters and is expected to come in around 3 percent for the final three-month period of 2018.
“We shouldnt be surprised by either comment as they are simply a summary of the recent data,” Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, said in a note. “Interestingly, there was no mention of the softer housing data. Moreover, there was no mention of the sell-off in the stock market in October which implies that Fed officials were largely willing to shrug it off.”
Volatility has gripped financial markets since mid-October, when Fed Chairman Jerome Powell made remarks that Wall Street took as hawkish for the pace of future rate hikes.
“Interest rates are still accommodative, but were gradually moving to a place where they will be neutral,” Powell said during an interview with PBS. “We may go past neutral, but were a long way from neutral at this point, probably.”
The FOMC at its September meeting actually voted to remove the word “accommodative” from its description of the current policy path. Powell and others have said the word is no longer useful in describing how the Fed is proceeding.
Bond strategists mostly expect the Fed to sound just like it did after its last meeting,ready to roll with its rate-hiking plans, when it issues its post-meeting statement at 2 p.m. That means another rate hike would be coming in December and the Fed sticks with its forecast for three more next year.
Since December 2015, the central bank has approved eight quarter-point rate hikes, bringing the benchmark rate to around a 10-year high.
Powells statements were followed by a prolonged stock market sell-off and a rise in short-term rates. The 2-year Treasury note eclipsed a decade high Thursday and the benchmark 10-year note is around 3.22 percent, near its high point since 2011.
With Novembers expected pause in rate hikes behind it, the market now will turn its sights toward December. Traders in the fed funds futures market are implying about a 93 percent probability for a hike at the years final meeting.
EUR/USD Rate Outlook Hinges of Fed Forward-Guidance
Fed officials at the September meeting pointed to three increases next year, but the market currently is pricing in only two. The September projections indicated at least one more hike in 2020, which the market also does not see.
The gap is significant as this weeks FOMC session marked the last time that Powell will not have a news conference afterwards. The Fed has not hiked rates during the current cycle at a meeting when the chair did not take questions afterwards. Starting in January, Powell will hold a conference after each of the committees eight meetings each year. That makes each meeting “live” in terms of its potential for a rate move — either up or down.
“A December rate hike appears to be a likely event at this point, but the outlook ahead is very different as the market and the Fed have differing views on how many rate hikes are in the cards for next year,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
Along with the move Thursday to keep the benchmark rate anchored at its current level, the committee voted to maintain the rate the Fed pays on excess bank reserves at 2.2 percent.
Increased inflation concerns loom ahead of Feds committee meeting
Market participants have been watching the IOER rate, as it is used as a guide for the funds rate. The two rates are now exactly equal, and if there is an appearance that reserves are getting scarce in the banking system and driving up rates, that could cause the Fed to halt the run-off of its balance sheet.
The central bank is allowing a capped level of $50 billion in proceeds to run off each month from the portfolio of bonds it purchased during its efforts to stimulate the economy. Some market participants expect the Fed will approve a 20 basis point increase for the IOER rate in December as a way to keep the funds rate from getting too close to the top end of its range. The current 2.2 percent funds rate is just 5 basis points away from the upper bound of the range.
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Wall Street falls after Fed statement, energy shares tumble
On Thursday, the central bank announced it has kept the target range for its benchmark interest rate unchanged in a band of 2%-2.25%.
Fed holds rates steady, December hike on tap
The Fed in September raised rates by 25 basis points to the current range, setting its benchmark interest rate at the highest level since April 2008. All nine voting members of the FOMC voted in favor of Thursdays decision.
Job gains have been strong, on average, in recent months, and the unemployment rate has declined, the Fed said in its statement on Thursday. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.
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The statement added that, Risks to the economic outlook appear roughly balanced. No mention of the market volatility seen in October appeared in the statement.
The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committees symmetric 2 percent objective over the medium term, the Feds statement said.
Thursdays announcement from the Fed is the first since President Donald Trumps most recent complaints about Fed policy, with the President in late October saying that he maybe regrets nominating Fed chair Jerome Powell for the job.
Interest rates: Federal Reserve signals December hike on upbeat economy
The Feds announcement came on a Thursday for the first time since September 2015, with Tuesdays election pushing back the start of its two-day policy meeting by one day.
In September, the Fed removed language that said its policy was accommodative, indicating that Fed officials see interest rates moving closer to a neutral setting that would support full employment and inflation running at the Feds 2% target. The Feds own interest rate forecast last updated in September indicated that one more rate hike would likely be appropriate in 2018. The Fed will make its final policy announcement of the year on December 18.
Fed meets to weigh future rate hikes
Thursday also marked the final time for the foreseeable future that a Fed meeting will not be accompanied by a press conference with Fed chair Jay Powell — beginning January, the Fed chair will speak to reporters after all eight of the central banks policy statements.