HomeContributorsFundamental AnalysisFederal Reserve Raises its Key Lending Rate and Signals More Hikes to...

Federal Reserve Raises its Key Lending Rate and Signals More Hikes to Come

As expected, the Federal Open Market Committee (FOMC) announced an increase in the federal funds target rate of 0.25 percentage points to a range between 3/4 to 1 percent.

The Committee’s assessment of the economic outlook noted ongoing progress toward the Fed’s dual mandate. The unemployment remained little changed and inflation moved "close to the Committee’s 2 percent longer run objective." The statement did note that core inflation was little changed and remained below 2 percent.

The summary of economic projections (SEP) released with the statement was largely unchanged. Expected economic growth edged up 0.1 percentage points to 2.1% for 2018, according to the median measure. The longer-run unemployment rate edged down 4.7% (from 4.8%). Inflation, as measured by the personal consumption expenditure (PCE) deflator, was unchanged, but core PCE inflation expectations edged up to 1.9% (from 1.8% previously) in 2017.

The median "dot" projection of FOMC members remained unchanged for both 2017 and 2018, but edged up 12 basis points to 3.0% from their December expectations.

There was one dissenter at the meeting, Neel Kashkari (President of the Minneapolis Federal Reserve Bank), "who preferred…to maintain the existing target range for the federal funds rate."

Key Implications

The FOMC’s decision to raise interest rates was telegraphed in advance and well-anticipated by financial markets. The FOMC dots – members’ expectations for future policy rates – was the real focus of this announcement. The dots showed a coalescing in the opinion of Fed members around expectations for three hikes in 2017 and 2018, but no significant change in the median projection. So, the Fed is a bit more confident, but no more hawkish than it was in December.

The Fed’s statement seemed to say mission accomplished on inflation, taking out its expectation that inflation would "rise" to target, but rather "stabilize" around it. It also noted that it would monitor "inflation developments relative to its symmetric inflation goal."

With continued progress toward the dual mandate, there is good reason to expect rates to continue to rise this year. However, flanking this view are considerable risks on both the upside and downside. On the upside, a more expansionary fiscal policy would likely cause the Fed to move faster than currently anticipated. On the downside, a bout of financial instability or heightened political uncertainty (either global or domestic) could stymie current economic progress and set the Fed back.

TD Bank Financial Group
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.

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