As expected, the Federal Reserve increased the Fed Funds rate by 0.25pp to a range of 2.25% - 2.50%. Materials from the meeting were significantly more dovish. Most importantly, Fed officials now see only two rate hikes in 2019 as opposed to three previously, putting the Fed Funds rate at 2.9% instead of 3.1% by the end of 2019. The Fed’s economic projections were virtually unchanged except the 2019 GDP forecast fell from +2.5% to +2.3%. The statement was mostly unchanged, and while it did describe the economy as “strong” there were two significant differences. First it included the word “some” when describing further rate hikes, and in a nod to current turmoil, it said the Fed “will continue to monitor global economic and financial developments…”. The financial markets were expecting something even more dovish and were disappointed. Stock markets swung from sharp gains to ugly losses and finished at lows for the year. The yield curve flattened another 7bp. Futures markets, which have been better predictors of Fed hikes than the Fed, are now giving only a 40% chance of any hikes in 2019, suggesting a negative view of the economy.
