The Markets’ Reactions To Fed Decision

The Fed raised rates by 25 basis points and increased the guidance for rate hikes in 2019 and 2020. I consider this to be a hawkish decision. We’ll go over the wording of the statement in this article, but first let’s look at the markets’ reactions to this decision and guidance. Stocks initially reacted positively to the news as the S&P 500 went from 2,734 to 2,738. I was flummoxed by the fact that stocks were up so much on the day since the Fed pushed guidance in a hawkish direction.

Personally, I don’t value the Fed’s economic forecasts. I do my own analysis and compare it with the Fed’s projections to see if the Fed is too optimistic or pessimistic. The reason why I’m mentioning this is because the market shouldn’t be excited that the Fed is optimistic about the economy. It’s not news because the Fed just reviews the data we already know. I think the Fed is slightly too optimistic, but either way the rate hike guidance is a bigger deal than the GDP forecast, meaning stocks should’ve fallen. Stocks ended up declining as the S&P 500 closed down 0.18% to 2,712. We’ll need to wait longer to seen when the market breaks out of this range.

The dollar index was down from $90.37 to $89.65. That’s an unusual outcome because the dollar has been increasing when stocks have fallen in the past few months. Technically, this decline isn’t important because the dollar index is still above its closing low of $88.59 which it made on February 15th. The range it has been in the past 2 months is between $88 and $91. Until it’s breaks out of that range, there’s not much to analyze.

Interestingly, the Fed fund futures became slightly more dovish after this decision and guidance. The chance of 2 hikes in 2018 went up 1.8% to 21.1%, the chance of 3 hikes went up 2.4% to 41.9%, and the chance of 4 hikes fell from 29.4% to 27.8%. I’m slightly surprised with such a small reaction since stocks fell somewhat sharply after the announcement.