FOMC – LIBOR to 3.50% Y/E 2020

The FOMC hiked rates 0.25%, pushing the Fed Funds range to 1.50%-1.75%.  1mL had already priced this in and set at 1.86% this morning.

More importantly, the Fed shifted higher the future path for Fed Funds by adding projected hikes in 2019 and 2020.  While the projected number of hikes in 2018 didn’t technically increase, it was a close call.  Had just one more FOMC member projected an additional hike, the median would have shifted to four hikes and the headline would be reading “Fed expects four rate hikes this year.”

Reaction by Rates
Largely a muted response.  Since the announcement, the 10T is up 0.01% to 2.90%, while the front end is unchanged.  Although prices are up from a week ago, anyone buying cap this week may have just dodged a major bullet.  Had the Fed shifted to four hikes this year, prices could have spiked far more dramatically.

Rate Hike Projections
2018 – two more hikes after today, putting LIBOR around 2.30% by the end of the year
2019 – increased from two hikes to three hikes, putting LIBOR around 3.0% by the end of 2019
2020 – increased from one hike to two hikes with LIBOR around 3.50% by the end of 2020

The Fed is betting the 10 year Treasury is going to play along and move higher.  If the 10T stays at current levels, the yield curve will invert at some point in 2019.

Economic outlook
Very positive on the economy.

• Unemployment rate forecast was revised lower to 3.8% this year and 3.6% next year.
• GDP forecast was increased to 2.7% this year and 2.4% in 2019, both higher from the December meeting.
• Inflation still relatively benign, now hitting 2.0% in 2019.
• During his press conference, Powell noted that numerous FOMC members raised concerns over tariffs, but that it was too early to tell what impact those could have on projections.

Bottom Line
Powell is still answering questions, but thus far he seems to have threaded the needle and not spooked markets one way or the other.