• Fed policymakers generally remained on message this week touting the strength of the U.S. economy and preparing investors for more rate hikes despite the volatility markets have experienced in Q4 2018.
  • On Tuesday, New York Fed President John Williams noted the economy’s “really very strong” momentum and said that further rate hikes still make sense over the next year.1 Fed Vice Chair Richard Clarida echoed Williams’ optimistic outlook in a Bloomberg TV appearance this week, adding that his “baseline outlook is very solid.”2
  • Both statements are in line with the Fed’s September Summary of Economic Projections, which forecasts another rate hike in 2018 and more than two in 2019, which would take the Fed funds rate to 3.1% by year-end.3
  • However, investors see a significantly less-active Fed in the next 12 months. As the chart shows, investor expectations for the target Fed funds rate as of December 2019 have been lower than the Fed’s forecasts throughout 2018.4 Over the past month, markets have trended lower, from approximately 2.9% to 2.6%, implying a rate hike in December and just one more next year.4
  • Regardless of the Fed funds rate’s actual path next year, it appears likely that, based on both market and Fed expectations, longer-term rates could also remain anchored close to their current levels. As a result, 2019 could be another year in which income-seeking investors remain challenged.

1 The Wall Street Journal, https://on.wsj.com/2PpU6Ga.
2 The Wall Street Journal, https://on.wsj.com/2L00oeX.
3 Federal Reserve Summary of Economic Projections, https://bit.ly/2ONvfMW.
4 Bloomberg, as of December 6, 2018.

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