• Today’s rate hike brings the target range for the fed funds rate up to 1.00-1.25%.
  • The statement was upbeat on the economic backdrop and labour market conditions. The Committee is "monitoring inflation developments closely" although that is not new to this policy statement.
  • Updated projections show slightly stronger growth is expected this year. Inflation was revised lower for 2017 but is forecast to return to 2% thereafter.
  • The unemployment rate has been revised lower by 0.2-0.3 percentage points over the forecast horizon. The rate is seen remaining below its longer run level, which was revised down to 4.6%.
  • The fed funds ‘dot plot’ was little changed. Most Committee members expect another rate hike this year, and a median of three more increases are seen as appropriate next year.
  • The Fed expects to begin normalizing its balance sheet this year. The announced monthly caps on holdings that will not be reinvested imply a gradual and predictable shrinking of asset holdings.

Our Take:

Today’s rate hike was fully expected and the Fed made few waves with their policy statement and updated projections. There were further details on the Committee’s plan to begin normalizing the balance sheet, a process they said is likely to start this year. The Fed is going to lengths to prime markets for a change in their reinvestment policy, likely with 2013’s ‘taper tantrum’ in mind. Their cautious approach is consistent with our view that the central bank will take a pass on raising rates in September when we expect they will begin tapering. Aside from that pause, we look for the Fed to continue gradually raising rates and think today’s meeting reinforces our forecast. Chair Yellen downplayed unexpectedly low inflation readings in recent months, attributing much of the shortfall to one-off price declines. She also indicated that conditions are in place for inflation to move higher. We agree that a tight labour market and above-trend growth should help reverse recent moderation in inflation. As such, further removal of accommodation is needed to keep monetary policy from falling behind the curve.

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