As usual, there was a fair amount of volatility following the Fed announcement yesterday. As usual, stocks spiked in both directions as the algos plowed through the statement and reacted to everything they found. And as usual, it took a few minutes for the humans to digest what Mr. Powell was saying at his first post-meeting press conference before the "real" trend took hold.

In the end, bond yields rose a bit and stock prices sank. So, let's see what we learned in the process.

First, we learned that Jay Powell wasn't interested in rocking the boat to any great degree. As expected, the FOMC raised interest rates for the sixth time this cycle, moving the target range for the fed funds rate up by 25 basis points to a range of 1.50%-1.75%. And while it was a close call, the "dot plot" doesn't (yet?) call for an additional rate in 2018.

However, the chances of an additional rate hike (bringing the total for the year to 4) did increase. You see, eight participants expect three or fewer hikes this year, while seven thought four or more rate increases would be needed. So, while the total for the year didn't technically change, it is clear that any further improvement in economic activity could cause the committee to swing toward another increase.

One of the key takeaways is that the data now suggests a steeper path of rate hikes is to be expected due to the improved economic outlook. Between 2018 and 2019, FOMC members now expect a total of seven hikes, with one additional hike being expected to 2020 and the end result being a Fed Funds rate of 3.375%.

In the Fed's updated economic projections, we learned that real GDP growth was upped to 2.7% from 2.5% in 2018 and to 2.4% from 2.1% in 2019. As for the unemployment rate, committee members see it falling across the board to 3.8% this year and to 3.6% in the following two years.

What was interesting however is the Fed doesn't see inflation picking up to any great degree. According to the report, FOMC members expect inflation to be only modestly higher in the future, with projections for core PCE prices rising to 2.1% in 2019 and 2020, which is up from the previous projections for a rate of 2.0%.

The bottom line is Powell & Company are trying to thread the needle here. "We’re trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate," Powell said during his press conference. The risk, of course, is the Fed acts either too quickly, which would result in inflation remaining below the 2% target, or too slowly, which would allow the economy to overheat. In turn, the Fed could then be forced to act more quickly, which would trigger a slowdown in the economy - I.E. a Fed-induced recession.

On To The Next Worry

This morning, markets are moving on to the next issue - the potential for a trade war. Investors appear to be bracing for another tariff announcement from the White House, this time targeting China regarding intellectual property.

As such, the major indices appear to be sporting big, red numbers in the early going as the game of "price exploration" to the downside looks to continue unabated.

Thought For The Day:

The way we choose to see the world creates the world we see. -Barry Neil Kaufman

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

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