Market Overview

The Federal Reserve, As Expected, Issues Third Rate Hike Of 2018

The Federal Reserve, As Expected, Issues Third Rate Hike Of 2018

The Federal Reserve delivered Wednesday the interest rate hike the markets were expecting. The Fed announced it will be upping the fed funds target rate by 0.25 percent to a range of 2.0-2.25 percent.

“Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate,” the Fed said in its statement.

Full Speed Ahead

Given the Fed has hit its 2-percent inflation target, the U.S. economy grew at a 4-percent rate in the most recent quarter and the unemployment rate is at its lowest level in 18 years, the Fed said it's likely to continue its current interest rate trajectory in the near-term. Interest rates are already at their highest level of the past decade.

“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term,” the Fed said.

Economist Reacts

RSM US LLP chief economist Joe Brusuelas certainly wasn’t surprised by the decision.

“This is in line with Fed rhetoric and the implied path of monetary policy embedded in the dot plots and the summary of economic productions,” Brusuelas said following the Fed’s decision. “The dot plot indicated that 12 of 16 participants are forecasting a fourth rate hike in 2018 and 11 of 16 expect three rate hikes in 2019 which would lift the range on the federal funds rate to between 2.75 to 3 roughly one year from now.”

Brusuelas said a subtle shift in language was the biggest takeaway from the statement.

“The major takeaway from the statement was the surprise removal of the phrase ‘accommodative’ from the statement, [which] is a major step forward by the central bank to prepare market participants and the public for the day when policy becomes restrictive,” he said.

What's Next

Despite the fact that rising interest rates are generally bad for stock prices, the SPDR S&P 500 ETF Trust (NYSE: SPY) traded slightly higher following the announcement.

The market now expects the Fed to deliver one more rate hike in 2018. According to CME Group, the fed fund futures market is pricing in a target rate of 2.25-2.50 percent by the Fed’s December meeting.

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