As widely expected, the Federal Open Market Committee (FOMC) raised its federal funds target rate range by 25 basis points to 1-1/2 to 1-3/4 percent.
Most notably, the statement noted that “the economic outlook has strengthened in recent months.” This was also reflected in upgraded forecasts for real GDP growth in the Survey of Economic Projections (SEP). The median projection for 2018 rose to 2.7% (from 2.5%) and increased to 2.4% (from 2.1%) for 2019.
Alongside faster economic growth, members lowered their expectation for the unemployment rate and nudged up their projections for inflation. The unemployment rate is now expected to trough at just 3.6% in 2019 (from 3.9% previously), where it is expected to stay through 2020 (down from 4.0% previously). The median expected rate over the longer-term edged down to 4.5% (from 4.6%). The median estimate for core PCE inflation rose to 2.1% for 2019 and 2020 (both up from 2.0% previously).
The median expectation for the federal funds rate was unchanged in 2018 at 2.1% (even as the mean moved up 13 basis points), but rose to 2.9% (from 2.7%) in 2019 and to 3.4% (from 3.1%) in 2020. The longer run projection edged up to 2.9% (from 2.8%).
Key Implications
The interest rate increase was the least interesting part of the package delivered today. Given the double-dose of fiscal stimulus delivered by Congress since December, FOMC members had little choice but to raise their expectations for economic growth and the number of rate hikes. Previously, only some included the fiscal stimulus in their projections.
On balance, the unchanged median projection for 2018 suggests a somewhat a dovish lean. The Fed doesn’t look to be keen to get too far in front of the expected pickup in economic growth, but is happy to make sure its outlook is realized before draining the punchbowl.
This is also evident in the SEP’s median projection for core inflation, which moved above the 2.0% mark in 2019 and 2020. A modest overshoot of inflation following nearly a decade in which it has run under its target should not come as a terrible surprise. But, it speaks volumes to the bias of the current much-changed FOMC not to push too hard or too soon against the rising fiscal tide.
