Fed’s Dovish Rate Hike Results in Sharp Sell-Off for Stocks

December 2018 Federal Reserve Dot Plot Showing FOMC Members' Interest Rate Projections
December 2018 Federal Reserve Dot Plot Showing FOMC Members’ Interest Rate Projections – Source: U.S. Federal Reserve

As widely expected, the Federal Reserve (Fed) raised the benchmark Federal Funds interest rate by 25 basis points to a range of 2.25-2.50% at the conclusion of Wednesday’s FOMC meeting. As also expected, the Fed signaled slower rate increases for 2019 and beyond through its so-called “dot plot.” The dot plot details interest rate projections by FOMC members. In its last meeting in September, the median dot plot outlook was for three rate hikes in 2019. Now, the median outlook is for only two hikes next year. This lowering of projections resulted in what may be considered a “dovish rate hike” by the Fed.

It’s All in the Dots

The dot plot shown above is the latest one from Wednesday. The median projection now lies around 2.9% for the end of 2019. In a previous FOMC meeting in September, though, the median was closer to 3.1%, as shown on the following dot plot from September:

September 2018 Federal Reserve Dot Plot Showing FOMC Members' Interest Rate Projections
September 2018 Federal Reserve Dot Plot Showing FOMC Members’ Interest Rate Projections – Source: U.S. Federal Reserve

This signals a clear slowing of rate increases going forward, making today’s Fed decision a dovish rate hike, as noted. This outcome was mostly expected by investors. However, stocks ended up dropping sharply in the aftermath of the Fed decision. There’s some speculation as to what may have contributed to this drop.

Why Did Stocks Drop?

For one, the Fed did not eliminate a reference to “further gradual increases” in the announcement, which is maybe why some investors were disappointed and selling ensued. Bearish sentiment has been exceptionally strong in recent weeks, and investors have been ready to dump stocks at the drop of a hat. Overall, though, judging by the market’s severely negative reaction to the decision at the market’s close on Wednesday, the Fed just may not have been dovish enough to satisfy nervous investors.


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Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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