Banking on a boring Fed
12/29/17

The Fed raised interest rates three times in 2017—the last time in December, bringing the Fed funds target rate range to 1.25%–1.5%. Opinions have varied on how many times the Fed is likely to hike rates over the course of 2018. Citing economic momentum and low unemployment as the New Year approached, Goldman Sachs in November pushed the most aggressive forecast, anticipating four increases in the Fed funds rate in 2018.1

After its last 2017 meeting on December 12-13, though, the Fed offered a three-hike outlook for 2018. If each increase is the standard 0.25%, the Fed’s projected rate schedule would bring the Fed funds rate to 2%–2.25% by this time next year—the highest it’s been since 2008. The following chart shows the S&P 500 and the Fed funds rate over the past decade:

S&P 500 (SPX) and Fed funds rate, 12/17/07 – 12/19/2017

Source: Federal Reserve Bank of St. Louis (data)

The markets, as any seasoned trader will tell you, don’t like surprises. A continued, regular schedule of Fed rate increases will likely make the market happy; deviation from its announced plan could give it a headache, if only temporarily. It’s a bit of a vicious circle: If the Fed decides economic conditions have weakened to the extent that a rate hike has to be delayed, it might foster uncertainty in the market, which might then cycle back into the economy, and so on.

When it comes to the Fed, boredom is a good thing. It’s dull reading, but it’s wise to keep tabs on the Fed’s statements (and meeting minutes) to get an idea if it’s adjusting its outlook or getting worried about something it sees in the economy. No sense in being surprised if you don’t have to be.

 

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1 Reuters. Goldman Sachs Predicts That the Fed Will Hike Interest Rates Four Times in 2018. 11/20/17.