The Fed: One hike and a flock of dovish signals - J.P. Morgan Asset Management
CLOSE

The Fed: One hike and a flock of dovish signals

Contributor Dr. David Kelly

The Federal Reserve raised its target for the federal funds rate to a range of 2.25%-2.50% . This was widely anticipated until recent market volatility and concerns over economic growth had markets uncertain about the Fed’s next move. Yet, the Federal Open Market Committee (FOMC) statement highlighted the strengthening labor market and economic activity, in particular job gains and household spending.

  • The FOMC released its economic projections, lowering expectations for real GDP growth to 3.0% from 3.1% for 2018, and to 2.3% from 2.5% for 2019. However, its long-run projection inched up to 1.9%. This reflects a likely moderation in near-term economic growth after an acceleration in Q2 and Q3 of this year. The unemployment rate is expected to be slightly higher in 2020 and 2021 than previously projected, although slightly lower in the long-run.
  • Inflation expectations also came down for 2018 and 2019 to 1.9%, from 2.1% and 2.0% respectively. PCE through October was 2.0% and core PCE was 1.8%, so these projections align more closely with the current conditions, which have been remarkably stable. Given the recent drop in oil prices, there are few reasons to question the Fed’s confidence in low and stable inflation in the medium term.
  • In its interest rate projections, the FOMC were more dovish. Investors should expect two rate hikes in 2019, as noted by Fed Chairman Jay Powell, who said they "now think it is more likely the economy will grow in a way that calls for two rate increases next year." Federal funds rate projections came down for the future, dropping to 3.1% from 3.4% in 2020 and 2021, and down to 2.8% from 3.0% in the long-run. This adjustment reflects fewer anticipated rate hikes.
  • Finally, the interest rate on excess reserves was raised by 20 basis points to 2.4%, just under the higher bound of the federal funds target range. By raising this rate by only 20 basis points rather than 25 basis points, this effectively narrows the range of the federal funds rate. This rate was last adjusted this summer.

While equity markets initially reacted negatively to the Fed’s actions, their caution and flexible policy approach combined with a lack of inflation pressures this late in the economic expansion are both long-term positives for U.S. stocks.

EXHIBIT 1: FOMC SEPTEMBER 2018 FORECASTS

Source: Federal Reserve, J.P. Morgan Asset Management. Data as of December 19, 2018 *Forecasts of 16 FOMC participations, medianestimate. **Green denotes an adjustment higher, red denotes an adjustment lower.

Related products

JPM Global Macro Opportunities Fund
Leveraging global macro themes to generate performance. This fund targets positive returns in various market conditions by capitalising on the opportunities created by economic trends within a risk-controlled framework.
JPM Unconstrained Bond Fund
JPM US Equity Income Fund

Important information

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields is not a reliable indicator of current and future results.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.