by Calculated Risk on 12/19/2018 05:27:00 PM

Some brief excerpts from research notes by economists at Merrill Lynch and Goldman Sachs …

From Merrill Lynch:

The Fed hiked rates while signaling a lower path, as we expected. ... We think Fed Chair Powell delivered a clear message: when the Fed has reached the neutral target range, there is a need for greater caution and policy to become ever more data dependent. This means that the threshold to bring rates into restrictive territory - above the neutral rate - is high. The Fed would need to see convincing data including a further decline in the unemployment rate, above target inflation with inflation expectations shifting higher and cooperative financial markets.

We are changing our call for the Fed. We now expect the Fed to hike just two more times in 2019 with no additional hikes in 2020. This would leave the terminal rate of the cycle to be 2.75 - 3.0% and shaves 50bp off our previous path of the Fed. The market has already shifted and is not even pricing in a full hike in 2019 with cuts in 2020. In our view, the Fed is too optimistic about the terminal rate but the market is too pessimistic. In addition, consistent with our forecast for fewer Fed hikes, we lower our US interest rate forecasts across the curve, with the 10yr ending at 3%.

From Goldman:

The FOMC raised the funds rate target range to 2¼% -2½%, as widely expected. The median dot in the Summary of Economic Projections now shows a 2-1 baseline for rate hikes in 2019-2020, compared to 3-1 in September, but the average dot declined significantly, a dovish surprise suggesting broad endorsement of the new baseline. Changes to the post-meeting statement were generally dovish as well. While the growth characterization was more upbeat than we had expected, the policy guidance was a bit more dovish than we had expected.