Fed Chair Powell’s Debut Features Expected Rate Hike

The 0.25% Fed Funds rate increase that was announced today was expected. Bond market reaction was mild as the 10 year traded in a tight range between 2.88% and 2.92%, settling at 2.88%. The 2 year increased to 2.30% after hitting a high of 2.34, so the yield curve remains flatter than usual. Powell’s first press conference as Fed Chair was smooth, he did not roil markets as he seemed to have “something for everyone”. He was relatively dovish on this year’s rate increases, the hotly discussed potential 4th increase for 2018 doesn’t seem to be in the cards. It looks like 3 increases in 2018 and 2 in 2019 (up from 2.5 and 1.5 respectively). Note that this puts the “end rate” at about 3.4% which is 0.5% of the Fed’s stated “neutral rate” that neither inhibits or stimulates growth. This means that the Fed is foreseeing a day when they may have to put the brakes on the economy. (The Fed has not taken such a stance in over a decade). This comes as the forecast for GDP growth is up to 2.7% for 2018 (0.2% increase over December’s prediction) and 2.4% for 2019 (0.3% increase). When will inflation finally hit the Fed target rate of 2%? According to Powell and the committee, it will be 2019 (predicted to be 2.1% after hitting 1.9% this year). Interestingly, Powell displayed the traditional independence of Fed Chair from the administration during the presser. He did not go along with the predicted 3.0% GDP that accompanied the pitch for the recent tax reform but indicated that number was “well above all estimates, current estimates of potential long-run growth”. He also took on the subject of tariffs, indicating that regional Fed banks are hearing from concerned business leaders about potential retaliation. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners