Fed: A final hike in March - Rabobank

The Federal Reserve rose the Fed Funds rate by 25bp, the fourth rate hike of the year. Analysts at Rabobank, think that the FOMC will pause a final rate hike in March 2019, leads to an inversion of the yield curve.

Key Quotes: 

“The Fed delivered a ‘hike light’ today: a 25 bps increase in the target range for the federal funds rate, accompanied by a 20 bps increase in the IOER rate.”

“There was a downward shift in the dot plot with one hike removed from 2019. Now the Committee expects to hike twice in 2019, one more time in 2020, and then to remain on hold in 2021.”

“The changes to the FOMC post-meeting statement reflect that monetary policy is now closer to the neutral level and becoming more data-dependent.”

“During the Q&A, Chairman Powell made clear that the Fed would not be influenced by President Trump’s tweets.”

“So the FOMC now expects to hike two times in 2019. However, we think that they will abort this plan after a final hike in March. The economy is losing momentum and it will be very hard to avoid a yield curve inversion in the coming months. This would induce the FOMC to take pause as they see an inversion as a sign of being in restrictive territory. However, history teaches us that it is an early warning signal for a recession 12-18 months later. We do not buy the Fed’s arguments that ‘this time is different’.”

“We expect an inversion at the 2-10 segment of the US treasury yield curve in 2019Q2 to be followed by a recession in 2020Q4.”