December 19 marks the day the Fed may have decided it’s going “all in” on the idea of a “strong U.S. economy.”
The Fed locked in an increase of the Federal Funds Rate from 2.25% to 2.40%, and it will increase the primary credit rate to a full 3.00%. These December increases were pretty much anticipated back in early November.
The increases came in spite of commentary by Jeffrey Gundlach from Doubleline, who said the Fed shouldn’t have raised rates:
I don’t think they should… The bond market is saying there’s no way the Fed should be raising interest rates.
From here on out, things get murky, and that uncertainty could very well set the tone for 2019.
Let’s start with the Fed’s now-infamous “dot plot,” below (sourced from their December projections document):
As you can see in the “dot plot” above, chances are Federal Fund rates will be soaring over 3 percent in 2019. In 2020, there is still a good chance rates will soar even higher, nearing 3.75 percent. It also looks as though rates will stay at or above 3 percent for the foreseeable future.
That means credit is about to get (and stay) more expensive. Growth is likely to slow down, and the cost of commodities could rise dramatically.
In fact, according to the Bureau of Labor and Statistics, food and most energy prices are already on the rise (emphasis ours):
Food prices increased 1.4 percent for the year ended November 2018. Prices for food at home increased 0.4 percent, while prices for food away from home rose 2.6 percent. In November 2018, prices for cereals and bakery products rose 1.3 percent, the largest 12-month increase among the six grocery store food groups.
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