Yesterday evening in European time, all eyes were again on the US Federal Reserve. Overall, the triple of Fed communiqué, projections and press conference went off without any major surprises. Prior to this, investors were already in almost unanimous agreement that the Fed would raise the key interest rate corridor by a further 25 basis points. The Fed has therefore delivered as expected, so that the range of the Fed Funds Rate now lies between 1.50% and 1.75%. Moreover, the central bank will be keeping to its gradual course of further interest rate hikes. Only marginal upward adjustments were made to the inflation and growth forecasts. The interest rate expectations of the US monetary authorities that are issued as part of the so-called „dot plot“ continue to signal three key interest rate hikes for the whole of 2018. However, the pace of rate increases for 2019 and 2020 has been revised upwards compared with the last FOMC projections. At the press conference, critical questions were raised about the US tax reform and a possible increase in protectionism. However, Powell confirmed on record that these issues were indeed being discussed, adding that no essential changes will be made (for the time being) to the Fed’s monetary policy course.
Financial markets react with relief
The reactions of financial markets to the Fed’s first interest rate meeting under Jerome Powell’s leadership were moderate despite the nervousness on financial markets leading up to this. Overall, market players reacted with relief. This may be due to the rumoured assumption among investor circles that the Fed Chairman would make hawkish statements. Ultimately, however, there is little to point to an acceleration in the current course of monetary policy. Yields on ten-year US Treasuries have trended downwards in an initial reaction to yesterday’s interest rate meeting. At first, gains were recorded on the US stock indices, but these later shifted into reverse as trading continued. The US dollar has lost value. The probability of four key interest rate increases has fallen slightly. Overall, all Fed officials have declared their agreement with the current direction of monetary policy.
On the whole, our assessment has been confirmed that the Fed will stick to its policy of gradual rate hikes. In keeping with the Fed’s top officials, we also expect only three rate hikes this year, with the next increase likely to take place in June. Another one will probably follow in December. The reduction of the Fed’s balance sheet, on the other hand, has been placed on autopilot. According to Powell, the Fed is unlikely to make any changes to the submitted plan for the foreseeable future.