The main event of a busy market week occurred today as the Federal Reserve Bank hiked interest rates by ¼ of 1%.
This was the fourth lift in 2018, taking the Fed Funds rate to a range of 2.25% to 2.5%.
As we laid out on Monday evening though: “it’s not what you do, it’s how you do it,” and investors did not completely agree with the how it was done.
The market was looking for Chairman Powell to thread the needle with a “dovish hike.” Under this scenario, his committee would raise rates today but dampen expectations for many/any future upward adjustments in 2019 – underscoring how close they are to the neutral rate (a.k.a. the end of this tightening cycle).
While the FOMC delivered a unanimous decision to hike, and the attendant language was mildly dovish, it was not dovish enough for the stock market.
The forecast now projects 2 rates hikes in 2019, as opposed to the 3 forecasted in September, and the neutral rate was trimmed to 2.75% from 3%.
Again, the statement and forecasts possessed a dovish tenor, but they remained sufficiently hawkish to erase the gains for the day and then some.
In his press conference following the announcement, Powell failed to assuage the markets. He attempted focus on the Fed’s ability to be patient as policy decisions are not on a preset course.
But the market focused only on his inflexibility in the process of reducing the size of the Fed’s balance sheet. (This refers to the Fed redeeming $50 billion of Treasury obligations each month instead of “rolling” over the liability and keeping that liquidity in the financial system.)
While the market seemed to be looking for sympathy from the Fed, Powell angled otherwise as he bluntly answered a question about the recent spate of volatility: “What matters for the broader economy is material changes in broader financial conditions that are unchanged…some volatility doesn’t probably leave a mark on the economy.1” In short – no, the Fed is not going to change course because the market is down.
The “Greenspan Put” was a term coined during Alan Greenspan’s time as Fed Chairman which referred to the Fed’s accommodative policy moves in reaction to stock market drops as a floor for asset prices. It’s a popular conclusion that this encouraged excess risk-taking and caused asset bubbles.
It’s evident that Powell is not willing to give the market a “Powell Put,” perhaps learning a lesson from past missteps.
For the equity markets, this wasn’t the immediate gratification it was seeking but there are definitely positives to take away from the day:
- The Fed believes the economy is strong enough to withstand these rate hikes. This is good news, not bad – it would be worse, in my opinion, if the Fed foresaw a significant slowdown in economic growth and productivity;
- The Fed is independent. There was much made about President Trump’s and notable investment figures criticizing the Fed and urging them to not raise rates – they didn’t blink which is good news because the market needs an impartial and unbiased central bank. They didn’t dramatically change course based on the stock market’s performance;
- The Fed is flexible and data dependent. The median forecasts, while useful to market participants, are not a consensus plan or a promise to act. As new data flows in to the Fed they will analyze and determine the best course of action – if it’s weak, the path can be altered and if it’s strong and the economy looks to be overheating, the path can be altered accordingly.
There will be much consternation the rest of the evening and into the end of the week over the Fed’s move but for now the hurdle is cleared, even if the Fed wasn’t so graceful in clearing it. The market will wrap up the year with 6.5 more trading days and most likely a lot of unanswered and noisy questions going into 2019.
Please reach out at any time to discuss the recent market developments with the team here at Kavar.
The views expressed herein are those of John Nagle on December 19, 2018 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This information is provided as a service to clients and friends of Kavar Capital Partners, LLC solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Past performance does not ensure future results. Kavar Capital Partners, LLC makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that Kavar Capital Partners, LLC considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and we are not obligated to update any information or opinions contained herein. Articles may not necessarily reflect the investment position or the strategies of our firm.