All eyes were on the Federal Reserve Bank last week. As expected, they confirmed a September Fed rate hike – the eighth since December 2015 . This 1/4 point increase brings the Fed Funds rate to 2-2.25%. Even after such a dramatic move higher from the zero-bound level, the rate is still very accommodating to the economy, banks and housing.
You are always going to have skeptics in the crowd who doubt the Fed’s slow approach; I’m sure you’ve heard them by now.
Here’s my take on the September Fed rate hike
Everything written in the statement and discussed at the follow-on news conference was positive. Chairman Powell’s first words were: “The economy is strong, and inflation is only rising moderately.” That is all I needed to hear to convince me that their strategy is spot on.
In fact, I was expecting to hear concern that inflation expectations are rising, but those were snuffed out in the press conference. As we approach the final two FOMC meetings of 2018, it appears a rate hike at the December meeting is very likely, which would bring us to four hikes in 2018.
A fourth hike worried many traders back in June, but now the markets seem to just take it in stride. Let’s all remember the neutral rate is somewhere around 2.7-3%, and if inflation does rise at a faster rate, the Fed Funds rate will rise above that level (at least temporarily). Anything under 3% is considered generous accommodation under emergency conditions. So is it necessary to treat a strong economy as if it were an emergency condition? Of course not.
The Fed’s economic projections were mostly in line with what they said in June. The only difference: expectations are tightened up a bit. Though tariffs were of concern to Chairman Powell, there is little evidence of a negative impact – yet. The sentiment is negative, but that can certainly shift on a dime.
To date, the approach the Fed is taking has been correct. I hope they will continue down their path to normalcy while monitoring the economic conditions and responding boldly if needed.