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It's Not Rational to Expect Fed to Cater to Trump's Demands

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Wednesday, 19 December 2018 04:23 PM Current | Bio | Archive

December 18,19 2018 FOMC Meeting

In a Nutshell: “The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity…”

Decision: Fed funds rate target range increased to 2.25% to 2.50%.

Faced with political pressure from the president to stop raising rates and panic on the part of investors who were seeing their massive capital gains disappear, the Fed could have punted. Instead, it decided to continue trying to win the game.

The FOMC, as expected, raised the fed funds target rate by a quarter point. And they had every good reason to do that. Indeed, if you look at the Committee’s description of the economy, there was no change: The economy is strong and inflation is near target. Indeed, in his press conference, Fed Chair Powell indicated there was little reason for the Fed to remain accommodative given its forecast for solid growth next year.

You would think that continued good growth and inflation under control would be good news for the markets. Wrong again. Unfortunately, with the president and the equity-focused commentaries demanding the Fed give up the rate normalization process, investors expected the Fed to announce that there would be no more rate hikes.

However, the Committee indicated that it expects to raise rates two times in 2019, down from the three projected at the September meeting. Only two moves are quite gradual and about as low as the Fed was likely to go. But that doesn’t mean we will get two increases. Last December, the FOMC indicated it expected three moves in 2018. We got four.

So how many rate hikes will there be? This is one of those “it depends” moments. The Fed marked growth down for 2019 but forecast it would still be above, or at worst at trend for the next three years. If we get more moderate growth, yes, we there might be only two increases. But you cannot rule out three if growth is stronger than projected. The tax cut might actually start working. Of course, if a trade war breaks out and the economy tanks, we might not see any at all.

Still, investors were not happy with the two-move projection and markets tanked. As I always say, markets may be efficient but that doesn’t insure they are rational. In this case, the knee jerk reaction made little sense given that the Fed indicated it was optimistic about growth. And as the Chair made it clear in his press conference, pressure, be it political or not, did not and will be a factor in decisions or even in the discussions. It’s all about the economy and the data will decide.

(The next FOMC meeting is January 29,30 2019.)

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
 

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JoelNaroff
Faced with political pressure from the president to stop raising rates and panic on the part of investors who were seeing their massive capital gains disappear, the Fed could have punted. Instead, it decided to continue trying to win the game.
fed, rate, hike, powell, trump
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2018-23-19
Wednesday, 19 December 2018 04:23 PM
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