We won’t bore you with yet another article about the recent rate hike by the Federal Reserve. This move was widely expected, as the Fed members had been hinting this would happen for several months now. Additionally, the new ‘hints’ about an additional two rate hikes later this year also didn’t surprise the market as we believe this was already priced in. The slight hike in the Federal Funds Rate estimate for 2019 to 3% (from 2.9%) didn’t see to worry the markets as the indices were all sent higher on the back of the FOMC meeting.
The ‘dot plot’ also caught our attention. Even though Yellen specifically announced the Fed was aiming for at least three rate hikes, the dot plot chart shows there are three members who are still expecting a maximum of two rate hikes. Surprising, considering the most recent interest rate decision was almost unanimous.
It made us scratch our heads as there didn’t seem to be any logical explanation at all, but then the Royal Bank of Canada came up with a theory which makes a lot of sense. Fed member Lockhart (Fed Atlanta- resigned at the end of February and could not possibly have submitted a new rate hike expectation. According to RBC, this could mean his (temporary?) replacement just submitted the same position as the previous time the Fed Atlanta was indicating, before Bostic was appointed as the new President and CEO of Fed Atlanta.
A logical explanation, but this wasn’t the only ‘interesting’ thing after the FOMC meeting. In the very first paragraph after officially announcing the rate hike, we could read this:
“ The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.”
The logical explanation here would be the interpretation the Fed wouldn’t allow the inflation rate to run at a higher percentage than 2% for a prolonged period of time, but the statement could also be read as the Fed explicity warning of a much higher inflation rate than originally anticipated. We know the market has always been prone to overshooting, either on the positive or negative side of the equation. We don’t think we have ever heard the Fed talk about ‘symmetric’ inflation, but as the FOMC members are leaking more intel than the Exson Valdez spilled oil, this position will undoubtedly be clarified in a ‘coincidental’ interview or public speech.
Source: Federal Reserve
Looking at the expectations of the Fed board members, they are practically still confirming ‘money’ is losing its value pretty fast. Whilst the median expected inflation rate is pretty close to 2%, an additional two-step rate hike would still put the ‘real’ interest rate below zero. And that’s what counts; your money is worth less day after day.
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