Wed, Jun 29, 2022 @ 17:11 GMT
HomeContributorsFundamental AnalysisFOMC Raises the Fed Funds Rate to Range of 1¾ to 2...

FOMC Raises the Fed Funds Rate to Range of 1¾ to 2 Percent

As was widely expected, the Federal Open Market Committee (FOMC) raised its federal funds target rate range by 25 basis points to between 1¾ and 2 percent.

The statement noted solid economic growth, declining unemployment and a pickup in household spending. The relatively upbeat assessment was reflected in upgraded near-term economic forecasts and lower expectations for the unemployment rate:

  • The median projection for real GDP growth in 2018 rose to 2.8% (from 2.7%) and was unchanged thereafter.
  • The median unemployment rate forecast fell to 3.6% in 2018 (from 3.8% previously) and to 3.5% in 2019 and 2020 respectively (from 3.6% previously). Nonetheless, there were no changes to the long-term rate, believed to be around 4.5% (though the overall range fell a tenth of a percentage point on both the low and high end to 4.1% to 4.7%).
  • On inflation, the median estimate for core PCE inflation rose to 2.1% in 2018 and 2019 up from 1.9% and 2.0%, respectively.
  • The median expectation for the federal funds rate target rose to 2.4% (from 2.1%) and to 3.1% (from 2.9%) in 2019, suggesting that the median expectation is for two more rate hikes this year (one higher than indicated in the previous statement). Expectations for the federal funds rate target were unchanged for 2020 and the longer run.

Key Implications

The Fed raised interest rates by 25 basis points but lowered the word count on its policy statement by 100 words (about a quarter). Most of the cut was related to forward guidance, with the statement no longer including the note that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” On balance, this suggests a somewhat more hawkish tone from the Committee.

The Committee’s confidence in its normalization path was further confirmed in the edging up of its expectations for rate hikes this year coupled with the firming in its expectations for economic growth, inflation, and lower unemployment.

Notably, the Fed has kept its expectations for the longer run unemployment rate at 4.5%, currently a full percentage point above its projection for 2020. The fact that the FOMC sees very little overshoot in inflation (just one tenth above its 2.0% target) suggests that it is confident that its policy path, which will bring the federal funds rate 50 basis points above its longer-run expectation, will be sufficient to keep inflation close to target.

TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

Featured Analysis

Learn Forex Trading