New Federal Reserve chair Jerome Powell had all kinds of excuses not to raise interest rates at last week’s FOMC meeting:
- The yield on the 10-year Treasury note was trading close to its highest point in more than four years and dangerously close to breaking the 3% barrier.
- Stocks have fallen well off their highs, and investors are nervous about the prospects of a potential trade war between the U.S. and its biggest trading partners, particularly China and Canada.
- The threat of that trade war has influenced some economic forecasters to lower their GDP growth forecasts for the first quarter to below 2%, which would be the lowest level since President Trump took office.
- The turmoil in the Trump Administration, with cabinet secretaries and other senior officials jumping ship or being pushed overboard, doesn’t help calm the waters.
Yet Powell and the seven other voting members of the Federal Open Market Committee saw fit to raise the federal funds rate by a quarter percentage point to a range between 1.5% and 1.75%. Not only that, but the FOMC stuck to its guns and indicated a steady diet of rate increases over the next three years, pushing rates closer and closer back to what used to be normal before the global financial crisis. After three rate increases this year, three more are likely next year followed by two more in 2020, which would boost the fed funds rates to a range of 3.25% and 3.5%.
And yet the world didn’t end. In fact, the yields on Treasury securities actually fell after the meeting ended on Wednesday afternoon. The 10-year note, the bond market’s long-term benchmark, trading just below 2.90% on Tuesday, fell five basis points after the meeting to 2.85%. The yield on the two-year note, which is more sensitive to interest rate changes, dropped seven bps after the meeting. Continue reading "The Powell Era Begins"