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In One Chart - December 20, 2018

In One Chart: Fed Hikes Rates, Market Hits New Lows

As the market expected, the Federal Open Market Committee (FOMC) raised the target range for the Fed Funds Rate from 2.0–2.25% to 2.25–2.5%.

Fed Chair Jerome Powell, who since taking the helm has been considered neutral, shared both hawkish and dovish comments in his address following the announcement. Powell’s and the FOMC’s decision to raise target rates was paired with the dovish caveat that we can expect two, not the previously expected three, rate hikes in 2019.

Investors hung on Powell’s every word and the market’s largest indices reacted accordingly. The Dow JonesS&P 500, and Nasdaq Composite plummeted on the news of a rate hike. As Chair Powell’s press conference began a slight rebound took hold, but ultimately proved temporary as the Fed’s economic outlook was interpreted to be negative and the drop continued — not so affectionately called a “dead cat bounce”.

Indices hit new 2018 lows in the twilight hours of the December 19 session. The chart below shows the three major indices year-to-date percentage changes.

While the ten voting FOMC members unanimously voted to raise the target rate yesterday, only six of the total sixteen members expect three rate hikes in 2019; this is a decrease from the September meeting, where nine members indicated three 2019 hikes on their infamous “dot plots”.

While capital has been historically inexpensive since the Fed lowered rates post-crisis, this and every other rate hike make borrowing more expensive. Since hikes began in 2015, rising rates have the potential to slow down investments made by businesses, and in turn, growth.

“Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening,” Chair Jay Powell said regarding future rate hikes. He also stated that the FOMC will be more “data dependent” in 2019, which analysts expect will make predicting future hikes more difficult.

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