Fed begins sweeping course change

Although that means monetary policy will be looser than expected, stock prices fell. The reason: the Fed continues to tighten. This not only concerns interest rate increases, but also the sale of the purchased bonds. Because the Fed sells those bonds, money comes into the central bank. That money is taken out of circulation, resulting in less liquidity in the system.

Prices must fall
Just because the Fed didn't give the markets what they hoped for doesn't mean that Fed Chairman Jerome Powell doesn't care about stock prices and is therefore different from his predecessors Greenspan, Yellen and Bernanke. They all came to the rescue of the markets when stock prices plunged.

Powell does that too. Although it seems that prices will have to fall further before he takes action (compared to his predecessors). And when he intervenes, he apparently intervenes less strongly. In other words: the markets no longer automatically get their way. And that of course takes some getting used to.

Multiple reasons
By the way, I think Powell had 2 more reasons why he couldn't give more to the markets, even though he might have wanted to. First, I think there was political pressure from the White House to stop raising rates. A self-respecting central banker then knows that he can do anything except what the White House asks. This is because otherwise his credibility will be compromised.

Secondly, adjusting interest rate expectations downwards now could be seen as panic football by investors. They can then ask questions about how strong the economy is if the Fed does not dare to raise interest rates beyond 2,5%. And the Fed cannot have that, partly because financial stability would be at risk.

Trump will continue to apply pressure
US President Donald Trump will continue to attack and pressure the Fed next year. Especially when 2020 (the year of elections) approaches and there will be less favorable economic news; think of lower economic growth or fewer new jobs. So I don't see the first hurdle to providing more support to the markets and the economy going away anytime soon. 

With regard to the second obstacle: I expect the Fed itself to slowly remove this in the coming period. I think many Fed members will prime the market for further adjustments to interest rate plans in the coming months.

Words from Powell
The reason for my expectations are Powell's words. During the press conference he said (referring to recent history) that the Fed responds to economic developments in relation to the bank's expectations. If the economy becomes stronger than the bank had anticipated, the Fed will raise interest rates more often.

The year 2018 is also an example of this. At the end of 2017, the Fed promised three interest rate increases. However, the economy performed better than expected and that is why the Fed increased interest rates. This week's increase is the fourth of this year.

Given the track record of expectations about economic growth is not very good (especially at turning points) and the chance that inflation will be lower in 2019 due to lower growth and the recent drop in the oil price, I would not be surprised if the bank clearly less hawkish is becoming.

The economic growth
And when Powell says that from now on the Fed will rely on economic data and that the Fed will be guided by that, then that by definition means a longer pause between rate increases.

Take economic growth. We will only know afterwards how high the growth was in 1 quarter. And this is still an initial (not always reliable) estimate. In short, regardless of whether growth turns out to be higher or lower than the bank expects, the Fed will want to wait to see if that initial signal is reliable. While the Fed waits, they will of course stay away from the interest rate button.

It would therefore not surprise me if the bank raises the official interest rate in the United States again in March and that it remains there in 2019. In 2020, I consider interest rate cuts more likely than new interest rate increases.