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Fed Increases Rates and Signals December Hike Is On Schedule

Today’s rate increase was well telegraphed and expected, the “action” was in the dot plot and commentary as usual. The quarter point increase brought the Fed Funds rate to 2.25%, a level last seen in mid 2008. With all of the recent coverage of the 10 year anniversary of the Lehman bankruptcy and worldwide economic crash, it’s interesting to see today’s increase and commentary as a return to normalcy. For the first time in nearly a decade the Fed statement did not include the term “accommodative” to describe their position on interest rates. The economy finally does not need “accommodation” and is moving towards the all important “neutral rate” (which is estimated to be somewhere around 3.00%). Dot plot: In addition to the December rate hike (which is becoming an annual holiday tradition since 2015), there are three increases set for 2019 and one in 2020. This would put the rate above the neutral rate and into “restrictive territory” for the first time in many years. Interestingly, the Fed sees Median GDP outlook for 2018 now above 3.0% with 2019 at 2.5%, 2020 at 2.0%, and 2021 at 1.8%. This is a classic “soft landing” for a hot economy, this is what Fed policy is supposed to produce. Speaking of the Fed mandate, there was an interesting moment in the press conference where Fed Chair Powell said that their aim is to create an environment “where everyone has a chance to succeed” but he also said there are “limits to what the Fed can do”. This is a sign that normalization is close. The statement included the usual assessment that “risks to the economic outlook appear roughly balanced” (which sounds a lot like the classic refrain at many real estate conferences where the outlook is described as “cautiously optimistic”). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners