Stock Analyst Update

Fed Maintains Target Rate, Dot Plot Increasingly Dovish

Eric Compton

As we highlighted in our last note, the Federal Reserve is no longer in any rush to raise rates. The Federal Open Market Committee voted to maintain its target rate range at 2.25%-2.5% in its second official meeting of 2019. The vote was unanimous. All things considered, we did not see any real surprises in the latest release, although the dot plot did become perhaps as dovish as possible. There were fewer changes to the language of the current release compared with the last release. The Fed emphasized that recent indicators point to slower growth for household spending and business fixed investment, but otherwise the language was essentially the same. We have maintained our underlying rate hike assumptions for our U.S. banking coverage, which includes no rate hikes in 2019, and only a single hike in mid-2020. CME futures data continues to point to no rate hikes in 2019, as does the Fed's dot plot. 

The Fed released new economic projections and a new dot plot. Compared with the December release, the longer run economic estimates were largely unchanged, however, the federal reserve members are now expecting slightly lower GDP growth in the short term as well as slightly higher unemployment levels. The dot plot, as expected, showed a significant downward revising for the expected rate hike outlook over the next three years, however, the longer-term expected rate was unchanged at 2.8%. In the meantime, it looks like even the FOMC is now expecting no rate hikes in 2019, potentially one hike in 2020, and potentially one more sometime thereafter. This is the first time in a long time that the Fed and futures data are in agreement.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.