When I checked the Fed Funds futures last week, the market had priced in a 100% chance that the Federal Reserve would hike rates 25 basis points at today’s FOMC meeting.
Well, the Fed didn’t disappoint. Chair Janet Yellen and her cadre of central bankers moved to raise the cost of capital by said amount for the first time in a year. The Fed’s target range was lifted from a range of 0.25% to 0.5% to 0.5% to 0.75%.
The surprise factor was virtually non-existent. So the initial reaction in markets was basically a yawn (although there was the usual immediate buying and selling post-Fed announcement).
The major indices were all down modestly 30 minutes after the 2 p.m. Eastern announcement. But then that yawn morphed into a decided sell-off, as stocks finished the day down almost 119 Dow points, or 0.6%.
Now, beyond the move in the Fed Funds rate, the real data point that I was waiting to see from the Fed today was what the "dots" would say.
The dots are the Fed’s projections of where interest rates may be in a year. Here, everyone was anticipating (and hoping) the Fed would keep the dots at a consensus of two. Meaning, the Fed intends to hike rates no more than twice in 2017.
It is here where the Fed offered up a December surprise.
That’s because the dots now indicate that the members of the central bank think there will be three 25-basis-point hikes by the end of next year.
The Fed now sees the Federal Funds rate rising to 1.4% in 2017. This is an increase from the 1.1% estimate reflected in the September FOMC meeting. The committee also now expects two or three hikes in 2018, and three hikes in 2019.
Of course, these dots are notoriously unreliable.
Recall that one year ago, the dots indicated that there would be four rate hikes in 2016. As it turned out, that was way off, as there was only one hike … and it arrived today.
Interestingly, the Fed made no mention in its statement about the potential for fiscal stimulus next year from the new Trump administration.
If there is a high level of fiscal stimulus injected into the economy via a major infrastructure spending program …
And if there are tax cuts on either the corporate or personal level …
Then that would most likely heat up the economy such that the Fed would move rate expectations much higher.
Remember that the Fed has two mandates: controlling inflation, and engineering the economy toward full employment.
Given that the November unemployment rate was just 4.6%, one could argue that this is about as close to full employment as it gets.
As for inflation, those expectations are rising. But the Fed made clear in its statement that the headline metric remains below the FOMC’s target:
Inflation has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports.
But if a lot of fiscal stimulus pours into the economy out of Washington, that would very likely cause inflation metrics to rise. And that would make the Fed much likelier to hike rates even further than today’s dot plot suggests.
In her presser today, Yellen reiterated the basic ideas from the FOMC statement.
Yet markets didn’t like what the Fed chair had to say. The Dow was down nearly 150 points, or about 0.5%, when Yellen wrapped up the press conference at around 3:20 p.m. Eastern.
The Fed made no official mention about the potential for fiscal stimulus next year by the Trump administration. But Yellen did make one eye-opening admission in the press conference.
That admission was:
"Some of the participants, but not all of the participants, did incorporate some assumption of a change in fiscal policy into their projections … "
While the official word is that the Fed didn’t consider a Trump fiscal stimulus agenda in its dot projections, the Yellen admission here pretty much reveals that at least a few of the FOMC members are preparing for Trump.
Wise investors would be smart to do the same, as more stimulus from the White House could mean more rate hikes from the Fed … and that may be a headwind for the economy, and for the stock market.
What’s your take on the Fed hike, the increased rate hike projections, and the Trump orange swan in the room? Will there be more moves by the central bank in 2017, or fewer? Let me know what you think by leaving me a comment on our website or sending me an e-mail.
The "Trump rally" was no match for the Fed’s second rate hike since 2006. The Dow, which had surged as high as 19,966 during the trading day, snapped its seven-day win streak and closed almost 119 points (-0.6%) lower than where it started the day.
• Tech travels to Trump Tower: Last month, Silicon Valley companies outlined their concerns and hopes for the new administration. And today, more than a dozen tech luminaries — from Apple, Facebook, Oracle, Microsoft, Tesla, Google, Amazon, IBM and more — met with the president-elect and his transition team. (Which includes tech investor and PayPal co-founder Peter Thiel.)
• Energy stocks were among the biggest losers today. WTI crude fell 3.7% to $51.04 per barrel after a rise in U.S. crude inventories. The Energy Select Sector SPDR (XLE) fell 2%.
• Utilities also weighed down the markets, with the Utilities SPDR (XLU) also falling 2%.
• Gold gained 0.4% in front of today’s rate hike. But gold miners took a tumble after the news came out, with the Market Vectors Gold Miners ETF (GDX) falling 5.5% and the Junior Gold Miners ETF (GDXJ) falling 6.4% for the day.
Good luck and happy investing,
Uncommon Wisdom Daily