The Changing Course of Fed Funds Rate Projections for the End of 2019

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On Thursday, November 28, 2018, the S&P 500 rose by 2.30%, its largest one-day increase since March 2018. The bulk of the move came during the second half of the day, beginning at the precise moment when Federal Reserve Governor Powell commented on interest rates.

In the weeks leading up to November 28, he and other Fed officials had been indicating an intention to continue gradually increasing the fed funds rate. The change of sentiment from “long way from neutral” on October 3, to “just below neutral” on November 28, marked a sharp reversal of the forward guidance they had been giving.

This subtle change caused the projected fed funds rate to continue to fall and the stock market to rise. The following speech and interview excerpts chronicle the changes in the Fed’s sentiment, corresponding to the dates in the chart highlighted in orange.

  • September 27, Chairman Powell: “We took another step on that path [toward normal] yesterday, with a quarter-point increase in short-term interest rates. These rates remain low”¹
  • October 2, Chairman Powell: “The baseline outlook of forecasters inside and outside the Fed is for more of the same…Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks”²
  • October 3. Chairman Powell: “We may go past neutral, but we’re a long way from neutral at this point, probably.”3
  • October 25, Vice Chairman Clarida: “even after our September decision [to raise rates], I believe U.S. monetary policy remains accommodativethe inflation-adjusted real funds rate remains below the range of estimates”4
  • November 27, Vice Chairman Clarida: “Although the real federal funds rate today is just below the range of longer-run estimates”5
  • November 28, Chairman Powell: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy”6

Whether it was the heightened market volatility in October and November, comments made by President Trump, or some other factor that lead to the change in Fed sentiment, investors may never know. They might, however, reasonably conclude that bringing an end to a period of unprecedented monetary accommodation is both easier said than done and unlikely to be without some recalibration along the way.

Links to speech transcripts:


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