Fed unlikely to hike rates in 2019

Fed becomes more dovish; Morningstar analyst Eric Crompton expects only a single hike in mid-2020

Eric Compton 31 January, 2019 | 6:00PM

As expected, the Federal Reserve is no longer in any rush to raise rates, and the Federal Open Market Committee (FOMC) voted to maintain its target rate range at 2.25%-2.5% in its first official meeting of 2019. The vote was unanimous.

There were more drastic changes in the language of the current release compared with the last release. First, the Fed removed language regarding future rate hikes being consistent with its goals, and instead simply said that it views an accomplishment of its goals as the most likely current outcome, without explicit reference to future hikes. Further, the Fed added the word “patient” with regards to future rate hikes. The FOMC’s statement also removed language related to the risk outlook remaining “roughly balanced,” and instead did not directly comment on this. All of these changes point to a significantly more dovish turn, in our view.

We have already updated our underlying rate hike assumptions for our banking coverage to include no rate hikes in 2019, and only a single hike in mid-2020. CME futures data continues to point to no rate hikes in 2019. As such, we expect some marginal net interest margin expansion in 2019 as the series of rate hikes in 2018 will have a full-year effect in 2019. We expect material increases in NIM to cease thereafter. We are maintaining our current fair value estimates across our banking coverage.

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Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,

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