Alternate FOMC Preview: Last Rate Hike Pending, But Possibility of Future Adjustments Linger

Introduction

The Federal Reserve’s monetary policy meeting, also known as the Federal Open Market Committee (FOMC), is one of the most eagerly awaited events for investors, businesses, and consumers alike. The FOMC’s mandate is to ensure the stability of prices, promote maximum employment, and foster economic growth. In doing so, it sets the federal funds rate, the interest rate that banks charge each other for overnight loans, which influences borrowing costs in the economy. On Wednesday, December 19, the FOMC will announce its final interest rate decision for 2018, and the market is expecting a 0.25% rate hike. However, the question on everyone’s mind is whether the FOMC will signal any changes in its monetary policy trajectory for 2019 and beyond.

Last Rate Hike Pending

At its September meeting, the FOMC raised the federal funds rate for the third time this year to a range of 2-2.25%. The rationale for the rate hike was the strong labor market, low inflation, and robust economic growth. In the post-meeting statement, the Committee reiterated its commitment to gradual rate increases inline with the neutral policy stance that neither stimulates nor restrains economic activity. Since then, the economic data has been mixed, with solid employment gains but weaker retail sales and industrial production. The latest reading on inflation, the consumer price index (CPI), came in at 2.2% annually, still above the Fed’s 2% target but showing signs of moderating. Nevertheless, the market consensus is that the FOMC will raise interest rates by another 25 basis points to 2.25-2.50% to complete its gradual normalization process.

Possibility of Future Adjustments

While the last rate hike may be imminent, the FOMC’s statement, projections, and press conference will provide crucial insights into its thinking about the path of interest rates going forward. The market mood has been shifting from the optimism of synchronized global growth and fiscal stimulus to the anxiety of trade tensions, political uncertainty, and financial market volatility. The concern is that the Fed may be hiking rates too fast and pushing the economy into a recession, or that it may be too dovish and endangering its credibility and inflation expectations. Hence, the FOMC’s communication strategy is critical in balancing its mission and risks.

Conclusion

The FOMC Preview for December 2018 indicates that the market is predicting a 0.25% rate hike. However, there is concern about the interest rate trajectory for 2019 and beyond. The FOMC’s pending decision will shed light on its thinking and plans for the economy. The decision is expected to be influenced by the strong labor market, low inflation, robust economic growth, retail sales and industrial production, and CPI. The increased market volatility and other factors may require a different tack from the FOMC than what is currently expected for 2019. It is critical to stay informed and remain prepared for any eventualities.

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