Talk to a representative today about our services that we offer and perform

Where Does the Fed Go From Here?

The Federal Reserve (Fed) just delivered a widely expected, but important monetary policy decisions. On January 30, policymakers decided to leave interest rates unchanged, removing the “some further gradual (rate) increases” language used in previous statements and adding a reference to being “patient” when determining future rate adjustments.

The Fed’s new stance is a swift reversal from its rate expectations offered as recently as four months ago. In September, policymakers’ projections showed the Fed was likely to hike rates three times in 2019. Now, as shown in the LPL Chart of the Day, markets think the Fed could be done hiking rates, at least through the end of 2019.

If the Fed is done hiking rates for the foreseeable future, are policymakers implying we’ve reached the neutral rateā€”or the point where policy is neither restrictive nor accommodative to the economy? The Fed’s December dot plot implies two rate hikes in 2019 and hints toward a long-term (neutral) rate around current levels, but we expect policymakers to adjust their expectations at the Fed’s next dot-plot update in March. Still, policymakers may keep projections for a few more rate hikes this cycle to give the Fed some wiggle room to tighten policy beyond neutral if inflation rises too quickly.

“We think the U.S. economy could digest future gradual rate hikes, based on solid economic conditions,” said LPL Research Chief Investment Strategist John Lynch. “However, the rate the economy can take is likely higher than equity markets are willing to embrace.”

Right now, we expect to see one or two more hikes this economic cycle, and not necessarily in 2019, if inflationary pressures build too quickly or other signs of excess appear. We haven’t seen evidence of these two things happening, nor have we seen any signs of deflationary threat, so we expect the Fed to continue its pause in the near term.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA/SIPC

For Public Use | Tracking # 1-818426 (Exp. 02/20)