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U.S. Federal Reserve boosts rate, lowers expectations for 2019


Yesterday the U.S. Federal Reserve (Fed) announced it was raising its Fed Fund's rate by 0.25% to 2.25% - 2.50%, making it the fourth interest rate hike of 2018. The unanimous decision was unsurprising given markets had pegged the likelihood of a rate hike at 66%.

Equity markets have been very volatile since the beginning of October and investors have been keenly anticipating the announcement and, in particular, were looking for any indication of future interest rate decisions.

Lowering expectations

Investors got their answer today—the Fed has decreased its year-end 2019 expectations and is forecasting just two additional rate hikes, down from the previous expectation of three. That reduction of 0.25% in 2019 means the expected Fed Funds rate for 2019 moves down to 2.75% - 3.00%.

For 2020, the median expectation is for one more hike of 0.25%.

Other key announcement highlights:

  • The Fed expects GDP growth and inflation to be slightly lower in 2019 than previously forecast—unemployment expectations, however, remain unchanged from September.
  • Investors interpreted the Fed's press release as a bit more “hawkish," leading to an immediate drop of over 1% on the S&P500 while the U.S. dollar spiked relative to other major currencies.
  • The U.S. ten-year government treasury yields dropped from over 2.83% to 2.78%.

The announcement aligned with our expectations, thus we don't see this announcement moving the needle much. As always, we will continue to monitor and analyse what the Fed says and how they say it in the new year. For more information, please do not hesitate to contact your MD Advisor.

About the Author

Edward Golding, CFA, MBA, was an Assistant Vice President with the Multi-Asset Management 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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