Where Does the Fed Go From Here?

February 11, 2019

The Federal Reserve (Fed) just delivered a widely expected, but important monetary policy decision. On January 30, policymakers decided to leave interest rates unchanged, removing the “some further gradual (rate) increases” language used in previous statements and adding a reference to being “patient” when determining future rate adjustments.

The Fed’s new stance is a swift reversal from its rate expectations offered as recently as four months ago. In September, policymakers’ projections showed the Fed was likely to hike rates three times in 2019. Now, as shown in the LPL Chart of the Day, markets think the Fed could be done hiking rates, at least through the end of 2019.


If the Fed is done hiking rates for the foreseeable future, are policymakers implying we’ve reached the neutral rate—or the point where policy is neither restrictive nor accommodative to the economy? The Fed’s December dot plot implies two rate hikes in 2019 and hints toward a long-term (neutral) rate around current levels, but we expect policymakers to adjust their expectations at the Fed’s next dot-plot update in March. Still, policymakers may keep projections for a few more rate hikes this cycle to give the Fed some wiggle room to tighten policy beyond neutral if inflation rises too quickly.

“We think the U.S. economy could digest future gradual rate hikes, based on solid economic conditions,” said LPL Research Chief Investment Strategist John Lynch. “However, the rate the economy can take is likely higher than equity markets are willing to embrace.”

Right now, we expect to see one or two more hikes this economic cycle, and not necessarily in 2019, if inflationary pressures build too quickly or other signs of excess appear. We haven’t seen evidence of these two things happening, nor have we seen any signs of a deflationary threat, so we expect the Fed to continue its pause in the near term.


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