Highlights:
- The target range for the fed funds rate was raised by 25 basis points to 1.75-2.00% in a unanimous decision.
- Growth and inflation projections for 2018 were revised slightly higher while the unemployment rate is expected to be even lower than previously forecast.
- The ‘dot plot’ was little changed, though consensus edged up to four total rate hikes this year from three previously.
- The committee took note of accelerating Q2 growth (activity now rising at a “solid” rate vs. “modest” previously), stronger household spending, and a recent decline in the unemployment rate.
- They also dropped an earlier comment that market-based measures of inflation compensation remain low—a change we thought could have been made in May. Instead, the statement focuses on stability in longer-term inflation expectations.
- Chairman Powell announced he’ll be conducting press conferences after all eight FOMC meetings starting in January.
Our Take:
Today’s rate hike was fully expected but changes to the accompanying policy statement and economic projections gave Fed watchers plenty to analyze. Those changes leaned hawkish and sent both the US dollar and interest rates higher. Most significantly the Fed dropped their forward guidance that rates will remain below neutral “for some time.” The committee consensus also shifted to seeing four total rate hikes as appropriate this year, up from three previously. But Chairman Powell downplayed these changes in his press conference, noting that the Fed’s policy outlook hasn’t changed. Dropping forward guidance is simply a reflection that rates are now closer to neutral, and changes to the dot plot were admittedly minor. Powell’s comments trimmed back some of the initial market moves.
So what to make of the changes? For now we think the Fed’s tightening cycle will remain in cruise control. Aside from a pause in Q3/17 to announce a change in their balance sheet policy, the central bank has now raised rates once per quarter since the end of 2016. And for good reason—decades-low unemployment, above-trend hiring and GDP growth, and inflation around 2% all indicate the time for highly-accommodative monetary policy has passed. With the fed funds rate remaining around 100 basis points below neutral, it’s hard to see the pace of tightening slowing in the near term. But as today’s statement showed, we are nearing the time for a discussion on how much further rates will need to rise to keep inflation in check. With plenty of fiscal stimulus being thrust upon an at-capacity economy, monetary policy arguably needs to become somewhat restrictive over the medium term. Our forecast assumes quarterly rate hikes will continue next year, pushing the fed funds rate above most estimates of the neutral rate.
