Morning Minutes 12/19/2018

Morning Minutes

FOMC Meeting Markets Preview

December 19, 2018
8:45 am EDT

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Market Commentary By:
Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

At 2:00 pm EST this afternoon, the US Federal Reserve Board announces its last interest rate decision of the year. Another 0.25% quarterly interest rate hike remains widely anticipated and has long been baked into investor expectations, the big question is where does the central bank go from here?

The accompanying statement, FOMC member economic and interest rate projections, and Fed Chair Powell’s press conference could attract a lot of attention from investors trying to figure out how many rate hikes to expect in 2019.

A hike today would move the Fed Funds rate up into the 2.25% to 2.50% range, leaving behind 2.00%, which has used by many central banks around the world as their long-term neutral goal for interest rates and inflation, including the Bank of Canada.  At the September meeting, Fed Funds projections from FOMC members (the infamous dot plot), for the end of 2019 were clustered in the 2.75% to 3.50% range, suggesting 2-4 hikes in 2019 assuming a hike today.

Up until a few weeks ago, rising wage and energy inflation and increasing treasury yields suggested that the Fed could need to continue its pace of quarterly rate hikes for another full year. The pressure on the Fed to keep raising rates has faded recently. The plunge in WTI crude oil from above $75.00/bbl to below $50.00/bbl dramatically reduces inflation pressures. Political pressure on the Fed to pause has also been increasing although President Trump’s criticisms of Chair Powell come off as laughable when considering that Trump drove the previous Fed Chair, Janet Yellen, out of office after accusing her of keeping rates too low for too long.

Treasury yields have been falling lately as well with the 10-year rate dropping back under 3.00% and continuing down toward 2.80% while the 30-year yield has fallen back close to the 3.00% level, suggesting that investors are starting to think that the Fed may not raise rates as many times next year as previously thought. The Fed may not announce a pause today, but if the previous main range of member projections for 2019 interest rate hikes comes down from 2-4 at all, the market could see that as dovish.

What the Fed decides and/or signals today could have major implications across asset classes. A dovish Fed could keep treasury yields falling which would support bond prices. A dovish Fed could slow the advance of the US Dollar. A rising greenback has been a headwind for commodities priced in US Dollars and for stocks because of the negative impact a higher Dollar can have on corporate earnings. A hawkish Fed and expectations of rising rates sent the 10 and 30-year yields climbing above 3.00% earlier this year which helped to trigger the February and October stock market selloffs. Signs that the Fed could be close to pausing its rate hike program could help to support stocks over the medium term.

Heading into the meeting US stock markets have started to rebound. Building on yesterday’s 82-point gain, Dow Futures are up 232 points at the time of writing. Don’t be surprised if markets stage quick swings in both directions just after 2:00 pm EST when the announcement comes out before settling on a direction.

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