No big surprise as U.S. Fed holds rate steady

November 9, 2018 Edward Golding

           

With the U.S. midterm elections pushing out the U.S. Federal Reserve announcement one day, the Fed yesterday left their target interest rate range steady at 2.00% - 2.25%. The Fed continues to make clear that economic conditions support future rate hikes. While the decision to hold surprised no one, the Fed came out with a clear message that future rate hikes are coming soon and markets now expect the Fed to raise rates in December.

Strong economic indicators

The announcement, similar to September's statement, nodded to key factors in the U.S. economy that support rising rates, including a strengthening labour market and rising economic activity. Household spending has also continued to grow strongly as the unemployment rate has dropped.

While business fixed investment has moderated from its rapid pace of growth early in the year, overall inflation remains near 2% and expectations for long-term inflation remain little changed.

Politics aside

Although U.S. President Donald Trump has expressed criticism about the rate hikes, Fed decision-making remains focused on economic conditions and employment and inflation objectives. Notably, there were no mentions of trade in this latest announcement despite growing tensions between China and the U.S.

Market impact

After the announcement, the S&P 500 traded slightly lower while the 10-year bond traded a little bit higher. We saw a bump up in the U.S. dollar – a bit of a surprise, given the uneventful nature of the announcement and the lack of anything unexpected.

About the Author

Edward Golding

Edward Golding, CFA, MBA, is an Assistant Vice President with the Investment Management and Strategy team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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