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FOMC Delivered, Market Disappointed

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FOMC raised the fed funds target range, by +25 bps, to 0.75%-1.00% with 9-1 vote. Minneapolis Fed President Neel Kashkari dissented as he favored leaving the monetary policy unchanged. The Summary of Projections (SEP) shows virtually the same macroeconomic outlook. Moreover, the median dot plot maintained three rate hikes this year and in 2018. Chair Janet Yellen noted that that the projections have not included potential fiscal stimulus promised by President Donald Trump. She also noted that the Committee discussed on balance sheet policy but no conclusion was reached. The market was disappointed, reflected in the decline in US dollar and Treasury yields, as they had anticipated more hawkish statement and some upward adjustments in economic forecasts.

In light of the rate hike, the Fed upgraded modestly its economic assessment in the accompanying statement. The members acknowledged that business fixed investment “appears to have firmed somewhat” while “inflation has increased in recent quarters, moving close to the committee’s 2% longer-run objective”. The description of the on household spending and labor markets was largely unchanged, noting that “household spending has continued to rise moderately” and “job gains remained solid and the unemployment rate was little changed in recent months”. The Fed also indicated that it would “carefully monitor actual and expected inflation developments relative to its symmetric inflation goal”. Headline CPI accelerated to +2.7% y/y in February, from +2.5% a month ago. This came in stronger than consensus of +2.6%. Core CPI eased to +2.2% from +2.3% in January. The current situation is that headline inflation might stay above +2% for some time while core inflation is expected to remain subdued. While the Fed had not mentioned “symmetric” previously, addition of such reference signals that the Fed will place more weight on trends in core inflation on future monetary decisions.

The median dot plots stayed essentially unchanged, projecting three rate hikes in both 2017 and 2018. This might be disappointing to those who expected four rate hikes next year. FOMC’s median estimate in dot plot stayed at 1.375% in 2017, 2.125% in 2018 and 2.875% in 2019, which is the assumed long-term rate. The economic projections were largely unchanged. There was only +0.1 percentage point increase in the median forecast for GDP growth in 2018, -0.1 percentage point decline in the assumed long-term unemployment rate (now 4.7%) and +0.1 percentage point lift in expected core inflation for this year.

In the concluding paragraph, the Fed reiterated that “it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions”. We notice that the consensus for three rate hikes this year is stronger than in December with now two more members expecting three rate hikes, five expecting more than three hikes and three expecting less than three hikes.

Median Dot Plots Continued to Project 3 Rate Hikes in 2017 and 2018