Markets react positively to the Fed rate hike decision

As the Fed moved the rate hike lever another notch higher, the financial markets reacted surprisingly well to the widely communicated news of a rate hike beforehand.

The U.S. short term Fed funds rate stands at 0.75% - 1.0% following the 25 basis point rate hike. The central bank maintained its view for projecting two more rate hikes for the remainder of the year which is now likely to keep the markets guessing.

Prior to the March rate hike, the markets were expecting the Fed to move in June and December. But now expectations are building that the next two rate hikes could be in June and September, leaving December as a potential candidate for another surprise rate hike if the economic conditions bode well.

 

Fed takes another step towards normalization

As expected by nearly every economist that was polled, the Federal Reserve Open Market Committee (FOMC) hiked interest rates for the third time since December 2015, bringing the effective short-term interest rates to 0.75% - 1.0%.

Speaking about the rate hike, the Fed Chair, Janet Yellen said that the decision was an appropriate response to the economy, noting that the rate hike was "in light of the economy's solid progress toward our goals of maximum employment and price stability".

The Fed chair also said that the rate hike decision did not represent any new reassessments of the U.S. economy, indicating that the Fed was simply following through on what it thought about the economy at the previous meeting in February.

The Fed Chair also indicated a certain sense of urgency as she reiterated that the rate hike decision reflected the Fed's view that "waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession."

In a way, Ms. Yellen indicated that the Fed was not falling behind the curve and that future rate hikes will come at a gradual pace.

 

Fed upbeat on U.S. economy

The central bank was also upbeat on the U.S. economy, especially on inflation. But the statement of the FOMC was slightly changed noting that its inflation target was symmetric. The statement sent mixed signals to the markets, but a majority viewed this as being dovish.

The Fed also maintained its language noting that the pace of rate hikes will be gradual. For many, the statement looked dovish than what was expected.

The central bank also made minimal changes to the economic projections. The median estimates for GDP growth for 2018 fourth quarter was slightly changed to 2.1% from 2.0% while growth for 2017 was unchanged at 2.1%

The Fed's forecast for the unemployment was untouched with only the estimate for the neutral unemployment rate which was revised down to 4.7% from 4.8% previously. Core PCE inflation for Q4 of 2017 was revised to 1.9% from 1.8%.

 

Impact of Trump's policies on the Fed

The Fed Chair, Janet Yellen also stressed that the potential impact of President Trump's proposed policies on tax cuts and infrastructure spending wasn't incorporated into the FOMC's economic projections.

"Changes in economic policies, including fiscal and other policies, could potentially affect the economic outlook. Of course, it is still too early to know how these policies will unfold. Moreover, fiscal policy is only one of many factors that can influence the outlook," Yellen said, speaking at the press conference.

For the markets, it was all about how hawkish the Fed could get with some projecting an additional rate hike while others expected the 'dot plot' to be pushed higher.

In hindsight, the Fed's decision to leave its economic projections and rate hike outlook unchanged reflect the fact that further economic data was required to ascertain the pace and strength in the U.S. economy.

Initial reports on how the U.S. economy fared in the first quarter will be coming out only in April meaning that the June FOMC meeting could be an important one as the Fed's outlook could be swayed in either direction.