Federal Reserve Chairman Jerome Powell confirmed the general market consensus on Wednesday that interest rates would rise by capping off a two-day monetary policy meeting with the announcement that the federal funds rate would elevate by 25 basis points to 2.25. Backed by data showing that the economy is experiencing forward growth momentum and a stock market that has seen record levels, the Fed was even more hawkish for 2019, predicting that three or more rate hikes are to be expected.
The rate hike, the third experienced thus far this year, effectively marks the end of an accommodative monetary policy as interpreted by many market analysts.
“The thing that folks were watching for, which they went ahead and did, was remove the word ‘accommodative’ in regard to their monetary policy,” said Michael Arone, chief investment strategist at State Street Global Advisors. “It does seem to potentially indicate they believe monetary policy is becoming less accommodative and getting more towards that neutral rate.”
Nonetheless, in a post-announcement presser, Powell was quick to point out that rate hike doesn’t necessarily signal a shift, but was effected in line with the current performance of the economy and the Fed’s expectations.
Related: Federal Reserve Hikes Rates Third Time by 25 Basis Points
Source: tradingeconomics.com
Trade Wars Possibly a Concern
One point of contention mentioned in the markets is that the Fed could give pause to their rate-hiking measures if trade wars continue to be a concern. Both the U.S. and China have already slapped each other with tariffs worth $50 billion total, which have raised questions on whether tariffs turn from sector-wide issues to broad economic disruptions.
However, the Fed veered away from any trade war language in their statement, but Powell did address the trade wars as something the central bank is eyeing. Market analysts are prognosticating that an escalation in the trade wars could give pause to the Fed’s current rate-hiking policies moving forward as they could potentially stymie economic growth.
Despite establishing this precedent on trade war questions, Powell didn’t sidestep the issue, commenting that the Federal Reserve is fully aware of the ongoing fret amongst not only the capital markets, but from actual businesses themselves.
“You will have seen that we have this very extensive network of business contacts around the country through reserve banks largely and we’ve been hearing a rising chorus of concerns from businesses all over the country,” Powell added.
However, despite the growing concerns of trade wars, Powell said its wide-ranging effects have yet to penetrate the economy and cause any disruptions.
For more trends in fixed income, visit the Rising Rates Channel.