fomc keeps rates steady nov 2018
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US Fed funds rate stair-stepping higher, now at 2.125 pt mid range (Source: Trading Econ/Fed Reserve)
US Fed funds rate stair-stepping higher, now at 2.125 pt mid range (Source: Trading Econ/Fed Reserve)

Thursday, 8 November 2018


  • Unanimous FOMC vote to maintain Fed funds at 2.125pct mid-range
    IOER rate also unchanged at 2.2pct
    FOMC continues to direct NY Fed to rollover $50 billion a month in maturing Treasury, agency debt
    No mention of "accommodative" in statement
    No mention of financial markets, stock selloff or housing


US monetary policy makers left the key US Fed funds rate unchanged at 2.125pct, in keeping with its year-long pattern of raising rates at every other meeting when press conferences are scheduled. Starting in 2019, all FOMC meetings will be followed by a press conference, led by chair Jay Powell, for the foreseeable future.


With no press conference in November, or update on the "dot plot" or revised growth and inflation forecasts, the market was left digesting its statement, which made no mention of housing or the stock market selloff in October, and for the second month in a row deleted the word "accommodative" from phraseology. At their September meeting when they raised rates by 25 bps,the FOMC's statement excluded the word for the first time since December 2015 when it began its current hiking cycle.


The Fed emphasized at the top of its statement the job market - "continued to strengthen" - and "that economic actitivity has been rising at a strong rate." While household spending continued to "grow strongly," they noted that business fixed investment moderated from the rapid pace seen earlier in the year.


Little was said on the inflation rate or inflation expectations despite signs of price pressures pushing through the supply chain and concerns that the 50-year low in unemployment will catalyze a sharp spurt higher in wage gains.


Commentary was limited to: "On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance."


However, probabilities remained high for a rate hike of 25 basis points come December and of "gradual rate hikes" going forwards in 2019, said several economists. CME FedWatch is currently pricing in the 71.4pct probability of a 25bps rate hike on 19th December, 22.2pct no change and 6.4pct for a 50bps rise.


"It will take a significant deterioration of economic data, financial conditions, or the trade environment to stop the FOMC from delivering an expected rate hike in December," said Paul-Andre Pinsonnault, economist with National Bank of Canada.


"The FOMC policy statement was little changed, with the “gradual” approach to rate hikes continuing. The latter has become synonymous with “quarterly”, so the Fed is implicitly signaling a December action – unless something changes materially between now and then (always a risk)," said Douglas Porter, chief economist with BMO Capital Markets.

Ahead of the report, while markets awaited word out of the Fed, the US Treasury yield hit a fresh 10-year high as did the three-month LIBOR, noted Peter Boockvar, chief investment Officer at Bleakley Advisory Group in Farfield, NJ.


"As a reminder, about 40% of Russell 2000 companies have floating rate debt that is most likely priced off LIBOR. The ratio for S&P 500 companies is about 25%," he said.


The 10-year Treasury bond showed yields backing off seven-year highs from Wednesday and trading around 3.22pct on the day.


The interest rate on the required and excess reserve balances (IOER) was also kept steady at 2.2pct, while the FOMC voted to continue to direct its New York Fed desk operations to continue rolling over $50 billion in Treasury and agency debt as it matured.


The minutes on Thursday 29 November "will be scrutinized for clues about the Fed’s views on important technical aspects of monetary policy implementation over the longer term, e.g. balance sheet, interest on reserves," said Pinsonnault.


"There were plenty of other things that the FOMC could have mentioned or discussed but that were not referenced at all: tariffs, stock market swoon in October, political noise, the balance sheet and the IOER rate," said Stephen Stanley, chief economist at Amherst Pierpont Securities.


"With the exception of political noise, I think we can fairly expect to see an extensive discussion of all these topics reflected in the FOMC minutes that will be released in three weeks' times, but including any of them in the statement would have sparked a flurry of unnecessary and undesirable market speculation. At this point, maintaining a steady hand on the wheel and carrying out the well-documented and firmly-entrenched strategy is the order of the day," he said.


Stephanie Sprague, Princeton NJ



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