As widely expected, the Federal Reserve raised its target rate by 25 basis points. Robert Both, Macro Strategist, TD Securities, talks to Sara D’Elia about the market reaction, how the U.S. rates outlook has evolved and how many hikes we could see through 2019.
We just heard from the Fed, who announced that they're hiking its policy rate by 25 basis points, marking what's the first of what the market thinks is three rate hikes in 2018. Here to explain what stood out is Robert Both from TD Securities. Thanks for being here.
Thanks for having me, Sarah.
Now, going into the statement today, you expected that we were going to see a hike. So what stood out to you?
What stood out to both us and the market is that the Fed signaled that they expect a hike three times this year. That fell a little short of what some in the market were thinking, which was that they would flag four hikes in 2018.
And in terms of the immediate market reaction, it wasn't a massive move. But you did read it as a bit dovish. How come?
Well, like I said, a lot of people were expecting them to signal those four rate hikes. But looking past the number of expected hikes in 2018, there were quite a few more hawkish developments in the statement and projections. For one, the Fed expects 2018 and 2019 GDP growth to be quite a bit stronger than they did in December. And there were downward revisions to the unemployment rate over the next few years as well.
You mentioned GDP and employment, but you said there's something interesting happening with inflation as well. What's the story there?
So the Fed's projections show that they expect core inflation to end 2019 at 2.1% year over year, which is above the 2% mandate from Congress. This signals that they view the target as symmetrical, and that implies that fewer rate hikes will be required to cap inflation at 2%, which is dovish.
One of the things-- you touch on dovish there, but you actually said press conferences could be interpreted as hawkish, making this a little bit of a harder statement to read through. What do you mean by that?
Well, the press conference is ongoing right now. But what markets will be looking for from Chairman Powell is whether he signals that the Fed is moving towards a press conference at every Fed meeting. That would be hawkish at face value, because some in the market believe at a press conference at every meeting would signal that they're more willing to hike at every meeting.
Meaning four more, potentially, this year?
Yes. Well, this would mean that the Fed could potentially hike more than four times, although we would remind people that the Fed has continuously repeated that every meeting and every decision is live, and that there is nothing that prevents them from hiking at a non-press-conference meeting currently.
And just to close things off, Rob, talk to us a little bit about your outlook for the Fed, both this year in 2018 and next year in 2019.
We expect the Fed to hike twice more in 2018, with those two rate hikes to come in June and September, and then three more hikes next year as well.
Rob, thanks for being here. You've given us a lot in terms of both dovish pieces and a little bit hawkish pieces today. It was a pleasure.
Thank you for having me.