Question

Read the latest FOMC statement (December 19, 2018) and explain the decision about the federal funds rate. What are the expectations about future changes in the federal funds rate? What was the reaction of the stock market immediately after the press release?

Answer 1

CHANGES IN FEDERAL RESERVE RATE AND EXPECTATIONS OF FUTURE CHANGES DUE TO FOMC STATEMENT RELEASED ON 19^th DECEMBER 2018-

The Committee was seeking to foster maximum employment and price stability according to their principles. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

While considering realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

The Fed expects two rate hikes in 2019. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations.

REACTION OF US STOCK MARKET AFTER FOMC STATEMENT-

U.S. stocks reduced gains on Wednesday with the Nasdaq index turning negative, after the Federal Reserve raised interest rates.

The Dow Jones Industrial Average rose 81.11 points, or 0.34 percent, to 23,756.75, the S&P 500 gained 6.7 points, or 0.26 percent, to 2,552.86 and the Nasdaq Composite dropped 10.61 points, or 0.16 percent, to 6,773.30.

Advancing issues outnumbered declining ones on the NYSE by a 1.32-to-1 ratio; on Nasdaq, a 1.06-to-1 ratio favored decliners.

The S&P 500 posted no new 52-week highs and 51 new lows; the Nasdaq Composite recorded four new highs and 400 new lows.