Highlights:
- The target range for the fed funds rate was raised another 25 basis points to 2.00-2.25%. Today’s move was widely expected and fully priced into markets.
- With the real policy rate now above zero (a more ‘normal’ policy stance) and nearing some estimates of the neutral rate, the statement no longer indicated monetary policy “remains accommodative.”
- The ‘dot plot’ medians were unchanged, continuing to show another rate hike this year and three moves in 2019.
- 2021 was added to the dot plot though the fed funds median is flat at 2020’s 3.25-3.50% range, indicating the central bank expects to raise rates only modestly above the assumed ‘neutral’ policy rate.
- The 2018 GDP growth forecast was revised up to 3.1% from 2.8% previously and next year’s projection was also nudged higher. Inflation and unemployment rate projections saw only slight revisions.
Our Take:
Today’s rate increase was widely expected and fully priced into markets. The closest thing to a surprise came from the policy statement, which no longer indicated “monetary policy remains accommodative.” Chair Powell noted that language has “run its useful life,” and while policy remains somewhat accommodative it is now close to the Fed’s range of estimates of the longer run ‘neutral’ rate (2.5-3.5%). So removing that phrase seems to be more of a milestone in the normalization process than an indication of where policy is heading from here. On that score, the ‘dot plot’ showed little shift in the Committee’s expected rate path, with another increase seen later this year and three hikes in 2019. That remains slightly ahead of what markets have priced in but below the four hikes we expect next year. We continue to see little reason for the Fed to slow their tightening process amid late-cycle fiscal stimulus. Upward revisions to the Committee’s growth forecasts are a testament to the US economy’s momentum, and we think upside risks to inflation argue for further rate hikes and an eventual shift to somewhat restrictive monetary policy.
