Zero Hedge

For the third time since June 2006, The Federal Reserve has hiked rates by 25bps (as 100% expected). If GDP forecasts for Q1 are correct, this will be the weakest economy since 1987 in which rates were increased.

In fact this could be the lowest since Q4 1980 according to BBG data…

Fed Headlines:

• FED RAISES BENCHMARK RATE TO 0.75%-1%; KASHKARI DISSENTS
• FED: INFLATION CLOSE TO GOAL, REFERS TO TARGET AS `SYMMETRIC’
• MINNEAPOLIS FED’S KASHKARI PREFERRED NO CHANGE IN RATES

RATES:

The target range for fed funds rate raised to 0.75%-1%; decision includes dissent from Minneapolis Fed’s Neel Kashkari, who preferred to keep rates unchanged; previous hike was last December

RATE OUTLOOK:

• Deletes the word “only” from expectation that U.S. economy to evolve in way that warrants “only gradual increases” in rates.
• Keeps reference to fed funds rates as likely to remain below long-run levels “for some time”
• Monetary policy will support “some further strengthening” in labor market, inflation’s return to 2%

INFLATION:

• Now says that inflation will “stabilize around” 2 percent over medium term vs prior description that it would rise to 2%
• Now says inflation’s moving close to 2% objective

ECONOMY:

• Fed continues to say economic activity expanded at “moderate pace,” U.S. labor market has continued to strengthen, and job gains are “solid”

RISKS:

• FOMC keeps previous assessment that near-term risks to outlook appear “roughly balanced”; continues to say it’s “closely” monitoring inflation indicators and global economic/financial developments

REINVESTMENT POLICY:

• Fed continues to say it will keep existing reinvestment policy in place until normalization of fed funds rate “is well under way”; FOMC’s holdings of longer-term securities to stay “at sizable levels”

The key thing going into the FOMC was what happens to the ‘2018’ dot (in the dot plot), and also whether the ‘Longer Run’ dot will be above 3% – which would be perceived as a very hawkish signal.

• MEDIAN FED OFFICIAL FORECASTS TWO MORE RATE HIKES IN 2017
• FIVE FED OFFICIALS SEE 4 OR MORE HIKES IN 2017, UNCH. VS DEC.

Simple before and after:

Some more dot details:

• 2017 median Fed funds 1.4% vs 1.4%
• 2018 median Fed funds 2.1% vs 2.1%
• 2019 median Fed funds 3.0% vs 2.9%
• Longer run Fed funds median at 3.0% compares to previous forecast of 3.0%

More hawkish.

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It appears that, the worse the economy was doing, the higher the odds of a rate hike.

Putting the Atlanta Fed’s forecast in context, 0.9% GDP would mark the weakest quarter since 1987 in which rates were raised, according to Julian Emanuel at UBS.

And since the Fed is hardly raising rates in light of the ongoing slowdown in the economy, one can only assume that the reason for the Fed’s hike is to put the breaks on runaway inflation and/or various asset bubbles.

The big question going in was – why is the dollar fading if everything’s so hawkishly awesome?

Banks stocks are the biggest winners since The Fed started hiking rates (but that is almost 100% driven since Trump won the election)…

Notably since The Fed first hiked rate in Dec 2015, 30Y yields have risen 14bps and 2Y yields have soared 38bps… (and after each hike, yields have tumbled)

The yield curve has dramatically flattened since The Fed started hiking rates, but that hasn’t stopped bank stocks from soaring…

Full Redline below:

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Finally, we note that, if history is any guide, stocks could be in for trouble after this 3rd rate hike…

“Many are familiar with the Wall Street adage ‘3 Steps and a Stumble’ popularized by Marty Zweig for the tendency of stocks to sell off after the 3rd Fed rate hike in the cycle,” said Nautilus Investment Research’s Tom Leveroni and Shourui Tian.

 

“The S&P 500 has endured significantly below average results from 1 to 12 months after 3rd rate hikes in 11 events back to 1955,” they wrote in a note on Tuesday. “Six (more than half) of those hikes occurred within a year of a major cyclical top for stocks (1955, 1965, 1968, 1973, 1980, 1999).”

The only exception was in 2004, when stocks continued to rally for another three years before the Great Recession. “Hikes are generally bad for stocks, somewhat bad for the US dollar, and bullish for 10-year yields and commodities,” Leveroni and Tian said.