The Chair of the U.S. Federal Reserve said two words on Wednesday that comforted markets when describing how far we are from a neutral Fed Funds rate. He said, “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy -- that is, neither speeding up nor slowing down growth”. This was taken by the market to mean that one more rate hike, presumably in December, would bring the Fed closer, if not right at neutral and that it would pause at that point. Fed Vice-Chair Richard Clarida made similar comments the day before saying the Fed was close to the neutral rate and called on the Fed to be data dependent. It is market participants that assume the Central Bank is on an announced schedule, not the Fed members.
The Market Assumes Too Much
Fed watchers in the markets and in financial media fell as if the Fed has settled into a quarterly rate hike cycle and that perceived cycle would continue with the expected December hike. The quarterly cycle, however, would only represent 2018 and only if a December rate hike happens. They raised rates 3 times in 2017, but skipped the 3rd quarter rate hike, which certainly doesn’t qualify as acting “quarterly”. In 2015 and 2016, they only raised once, but years in December. So this perception of hikes every quarter in 2019 was assumed by the markets. The FOMC minutes, released Thursday confirmed that in their last policy meeting at the beginning of November, Fed officials were concerned about tariffs and debt and many wanted to remove language pointing to ‘further gradual’ interest rate hikes, which may be where the market got the quarterly-cycle idea. If they are talking about “further gradual” rate hikes, they must mean continuing what they have already been doing in 2018. At the end of the day, however, the Fed gave the market what it needed, but the idea of a sudden about-face is not accurate. When you look at the minutes of the last meeting and understand that in order to comment appropriately on monetary policy, the Fed Chair must do it only in an appropriate setting you come to the conclusion that the market was just assuming something that was never a fact. Bad market.