Devil is in the dots: Widely-predicted Fed hike unsettles investors

The Federal Reserve’s dot plot unsettled markets as Jerome Powell delivered a widely expected rate hike in his first meeting since succeeding Janet Yellen as chair of the central bank.

Devil is in the dots: Widely-predicted Fed hike unsettles investors

In Powell’s first meeting as chairman, the Federal Open Markets Committee (FOMC) raised rates by 0.25% to a target range of 1.5% to 1.75%, in light of a “strengthening economic outlook in recent months”.

Powell said: “The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC’s 2% longer-run goal.”

In a statement, the FOMC said it expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong.

It said: “Inflation on a 12‑month basis is expected to move up in coming months and to stabilise around the committee’s 2% objective over the medium term.

“Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.”

However, confidence in the US economy fell as US markets ended the day lower with the S&P 500 and Dow Jones down 0.18%, and Nasdaq Composite down 0.26%.

Something’s gotta give

While a rate hike was expected, Michael Metcalfe, global head of macro strategy at State Street Global Markets said “the devil was in the dots”.

In the FOMC’s statement, the US central bank made no change to the three hikes they expect for this year but added one more hike to the dot plot in 2019.

“The upward revision to growth forecasts was not a surprise, but given low levels of inflation, the additional hikes forecast for 2019 and beyond was more hawkish than anticipated.

“With the unemployment rate now firmly below its long-run equilibrium, the implication is that the Federal Reserve (Fed) needs to normalise rates at a gradual and regular pace.

“Perhaps most disturbing for the market is moving up the long-run projections of the Fed funds rate, as that will cast doubt as to where rates will eventually peak if the economy proceeds along the path the Fed has projected.”

Likewise, Tim Foster, fixed income portfolio manager, Fidelity International said the focus was also on the dots plot and Fed’s updated economic projections.

Foster said: “The message in a nutshell is that data, so far, is still not strong enough to justify a faster hiking cycle this year. Further down the line, however, things are looking brighter, with either lingering slack or a long-awaited pick-up in productivity that will keep inflation under control.

“This is by all means a ‘hopeful’ Fed that’s shifting away from the data-dependent approach that Janet Yellen got us used to.

“In our view, however, something will eventually have to give, and the Fed’s confidence in their ability to stay on the rate path they set may soon be tested by either the economy or the market.”

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