March 21, 2019. By Mark Barry:

Following the conclusion of its two-day March meeting, the FOMC announced its interest rate decision which was to maintain the Fed Funds rate at 2.25%-2.50% (no change). This was largely expected by investors. However, in both his prepared statement and in answering questions during the press conference, Fed chairman Jerome Powell struck a more dovish tone than anticipated by the markets and signaled that additional rate hikes in 2019 were unlikely. Treasury yields fell in response to this news, and the equity market reaction was mixed – while keeping rates on hold is supportive of equity prices, the Fed had a more downbeat (albeit still positive) assessment of economic growth in the United States which would be a headwind for stocks.

As for the future direction of the Fed Funds rate, the Fed signaled that they believe the current level of interest rates is appropriate given economic conditions. This is supported by the dot plot below, with the dark blue dots (one for each member of the FOMC) clustered around the current target rate for 2019.

However, Chairman Powell did emphasize that the Fed would remain flexible with respect to the future path of interest rates, and indicated that any adjustment would be driven by future economic data as it becomes available. Investors should thus keep a close eye on incoming economic data as well as corporate fundamentals moving into the second half of 2019.

Overall, we view the Fed’s current approach to monetary policy as positive for investors; they have acknowledged that interest rates are closing in on the neutral level and as such will be patient and require proof before making any policy adjustments. In the past the Fed has appeared beholden to a particular path of rate increases only to have to reverse course suddenly after realizing they had overtightened, so the fact that they are “keeping an open mind” with respect to future rate hikes/cuts is encouraging and has the potential to prolong the current economic expansion.