The rate hike came as no surprise. The Federal Reserve was widely expected to announce a 25-basis-point pop after its Wednesday meeting.
Instead, it was the nuance of the policy statement that piqued reactions.
“Seemingly comforted by domestic economic dynamism, and confident enough to brush aside the more uncertain international context, the Fed is seen by markets as more hawkish than consensus expectations,” Allianz chief economist Mohamed El-Erian told Benzinga.
Federal Reserve Chairman Jerome Powell said in a press conference that the Fed is strongly committed to 2 percent inflation, and barriers to changing that are very high.
How To Read The Release
RSM Chief Economist Joe Brusuelas said the language signals the Fed “intends to tolerate temporary deviation away from its inflation target in the near term.”
The Fed’s favorable economic outlook was equally revealing.
“The upgrade to the summary of economic projections implies that the Fed recognizes it will soon face a monumental decision,” Brusuelas said.
The additional announcement that every meeting beginning in January would be followed by press conferences “clearly signaled that change to monetary policy is in the offing,” he added. Traditionally, only four of the monthly meetings preceded conferences, as they alone were considered likely to birth policy change.
Greg McBride, Bankrate’s chief financial analyst, similarly deduced preparation for accelerated action.
“The labor market is getting tighter and price pressures are picking up,” McBride wrote in an analysis. “The Fed is prepared to be quicker about pushing rates higher – and markets aren’t going to like it.”
What’s On The Horizon
"The increased economic outlook echoes the strong corporate earnings expectation for the remainder of the year following nearly 25 percent earnings growth and nearly 9 percent revenue growth in the S&P 500 for Q1," said Victor Jones, TD Ameritrade's director of trading.
McBride expects two more rate hikes in the second half of the year, which are seen to burden borrowers with tight budgets and stunt buying power if not coupled with comparable wage increases.
Brusuelas, however, inferred a “growing probability” of just one more hike in 2018, likely in December, as the Fed pursues a perceived optimal policy of 2.55 percent.
“While, the remainder of 2018 will be defined by the late cycle fiscal boost in train and risks around the outlook linked to US trade protectionism and political risk in the Eurozone connected to the new government in Italy, the major policy decision by the Federal Reserve that will define the final innings of the business cycle likely arrive in the March to June period of 2019,” Brusuelas said.
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