Fed Raises Rates as Expected, Accompanying “Hawkish” Statement Does NOT Roil Markets (At Least Not Yet)

Today’s Rate Increase was expected and “baked in” to markets, all the “action” was in the statement and presser by Fed Chair Powell. Powell’s performance was soothing to markets, which easily could have been “spooked” by the Fed Statement. Highlights from the statement: (1) Although the word “accommodative” remained in the statement (a staple since the crisis), the phrase about keeping rates low “for some time” was dropped for the first time in years, (2) Four rate increases are anticipated for this year (that means two more hikes, most likely in September and December) with three increases in 2019. Note that one more committee member signed on to the four increases this year, (3) Economic growth is described as “rising at a solid rate” instead of “moderate”; “adjustments” are now referred to as “increases” (showing an upward trend in growth and rates is now assumed). The remaining five rate increases in 2018 and 2019 would bring the Fed Funds rate up to 3.25% (up from 2.00% today). That would be slightly above the 2.9% (approx.) assumed neutral rate (the rate which neither stimulates or hampers growth). But today was significant in what didn’t happen: no major market volatility. In recent years, the market would sometimes react to good economic news with “contrarian volatility” as the formula was good news = potential rate increases = “taking away the punchbowl” of central banks propping up economies which is therefore “bad news”. The relatively tepid reaction to today’s positive outlook and rate increase may be showing a more “normal” economy less dependent on central banks. Tomorrow’s highly anticipated ECB comments on their bond buying program will be closely watched and may continue today’s theme of “normalization”.  Prime Rate is now 5.00% and 30 Day LIBOR is 2.05%, both thresholds last seen in 2008. Stay tuned.