While the rate hike outlook has become more uncertain over the past several months, it was still largely expected that the Federal Open Market Committee would raise its target rate at its December meeting. The FOMC did not disappoint and voted to raise its target rate range to 2.25%-2.5%. The vote was unanimous. There was again a slight change in the language of the release as well as a more dovish looking dot plot. The FOMC’s statement maintained its language that further hikes would be gradual and that the risk outlook remains roughly balanced; however, the committee replaced the word “expects” with “judges” when describing how it thought about the effect of these further gradual rate hikes on the economy and inflation. This, combined with additional language about continuing to monitor global economic and financial developments (which was also not in the previous release), leads us to conclude the Fed is giving a nod to some of the uncertainty regarding the economy and the effects of future hikes and is leaving the door open to slow down future rate increases. Further confirming this more dovish tilt, the dot plot also shifted, with many of the higher rate dots shifting down, creating a lower projected median rate. The 2019 median projected rate is now 2.9%, down from the 3.1% rate given at the September meeting, and the longer run median rate is now projected at 2.8%, down from 3.0%. CME futures data further reflects this shift, and is in fact even more dovish than the Fed, with the highest probability given to zero rate hikes in 2019. Overall, our long-term rate projection remains intact, where we expect a normalized policy rate of roughly 2.75% to be reached in the next couple years. We would expect overall net interest margins to increase at a reduced pace regardless, as competition picks up among banks. We are leaving current fair value estimates in place for all our banks.
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