As was widely expected, the Fed kept interest rates unchanged at the end of its latest two-day policy meeting. However, it indicated that gradual increases are in store in the near future. It also expressed confidence in the economy while noting that business investment has slowed somewhat. However, it refrained from sounding alarmist on issues like recent market volatility and the slowdown in housing.
Market watchers think the central bank’s latest policy statement clearly indicates that a rate hike is nearly certain in December. Further, three more rate hikes are likely in 2019. An increase in rates widens the yield spread for banks, which in turn boosts their margins. Adding banking stocks to your portfolio looks like a smart option at this point.
Rate Increase Likely After Next Meeting
At the end of its two-day policy meeting, the Federal Reserve opted to keep the target range for the federal funds rate unchanged at 2 to 2.25%. However, it stated that “further gradual increases” would be needed given the current pace of economic growth, strong labor market conditions and the Fed’s inflation target of 2%.
Most investors put chances of the Fed hiking rates by 0.25% in December at 80%. This inference is being drawn from the central bank’s September dot plot. Per this forecast of interest rate projections, most Fed officials predict that the funds rate will be 0.25% higher by the end of 2018. The central bank has already hiked rates thrice this year.
The absence of any change instance in the latest policy statement also indicates that the Fed still wishes to hike rates thrice in 2019. However, markets expect a more dovish approach, with the CME Group’s Fed Watch tool predicting only two hikes next year.
Fed Upbeat on Economy, Labor Market
The Fed also struck an upbeat note on the economy and the labor market. The central bank observed that economic expansion has been proceeding at a “strong rate.” This is a reference to the fact that GDP has increased at an average rate of 3.3% for the first three quarters and that it is likely to come in at around 3% for the year’s final quarter.
