Fed hikes rates and raises GDP forecast

Mar 21, 2018

Big day today. Finally, at 2:00 am ET the FOMC statement: by 2:15 the 10 yr note rate +2 bp to 2.93%. At 2:30 Fed chair Powell had his news conference.

 

As expected, the Fed increased the Federal Funds rate by 0.25% to a range between 1.50% and 1.75%. As usual when the FOMC meets markets exhibit a good deal of volatility; the initial reaction sent the 10 yr note yield to 2.93% 4 bps higher than yesterday, MBS prices swung back and forth before settling. The 10 found support at 2.93% and by 4:00 back at 2.88% -1 bp. Fannie 4.0 30 yr coupon up 14 bps on the day and up 20 bps from 9:30. The stock market rallied initially then cooled, the DJIA ran up 237 points before giving back all of the knee-jerk reaction and went negative.

 

  • labor market has continued to strengthen and that economic activity has been rising at a moderate rate.
  • Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.
  • On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent.
  • The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.
  • In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
  • The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.

 

As far as more rate increases after a lot of back and forth from market participants it now looks like the Fed will do what we have been projecting; three hikes this year, not four as some were thinking. The initial reactions from media, as usual, talking in circles. Making more of the statement than is necessary. One thing not in the prepared statement, any inference or reference about the trade issues. Overall nothing new in the statement that has much direct significance. The same thing as usual; pending the economic performance and inflation will dictate what the Fed will do in the future.

 

The Fed increased its growth estimates somewhat for 2018; from 2.5% in Dec to 2.7% now; unemployment in Dec for 2018 was 3.9%, now 3.8%, 3.6 in both 2019 and 2020. Inflation in the data unchanged from Dec at 1.9%; also core inflation unchanged from Dec at 1.9%. The range of Federal Funds rate this year 2.1%, 2019 2.9%, 2020 3.4%.

 

Asked about whether there was a discussion in the meeting about the potential of trade problems, Powell said the belief at the Fed is that trade changes will not affect the Fed’s outlook for growth longer term. He remarked some members have spoken with business leaders and that businesses are not as confident as the Fed appears to be.

 

Feb existing home sales this morning were better than expected. Sales of single-family homes rose 4.2 percent in the month to a 4.960 million rate with this yearly reading at plus 1.8 percent. This offsets continued weakness for condo sales which fell a sharp 6.5 percent in the month for a year-on-year minus 4.9 percent. Supply increased to 1.590 mil +4.6%. On Friday, Feb new home sales will be released and expected to show improvement of 4.3% from Jan.

 

Tomorrow not much scheduled news; weekly jobless claims expected about unchanged from the prior week. Feb leading economic indicators thought to be up 0.3 percent.

 

Source: TBWS

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