Fed delivered the 25bps rate hike and lifted the federal funds rate to 1.50-1.75% as widely expected. But Dollar bulls are clearly dissatisfied with the updated economic projections. The accompanying statement is nearly a carbon copy of the prior one with balanced changes. It added that “recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.” But at the same time, “economic outlook has strengthened in recent months.” The interest rate decision was made with unanimous 8-0 vote.
Going into the projections:
Real GDP forecast for 2018 is raised to 2.7% (up from 2.5%), for 2019 raised to 2.4% (up from 2.1%), for 2020 unchanged at 2.0%.
- Implication is that Fed is expecting slight boost from tax cuts in 2018 and 2019. But the impact won’t be long lasting and would fade into 2020.
Unemployment rate forecast for 2018 is lowered to 3.8% (down from 3.9%), for 2019 lowered to 3.6% (down from 3.9%), for 2020 lowered to 3.6% (down from 4.0%).
- The employment market is expected to improve further, with the help of tax cuts and expansive fiscal policy. And the impact would sustain.
PCE inflation forecast for 2018 unchanged at 1.9%, for 2019 unchanged at 2.0%, for 2020 raised to 2.1% (up from 2.0%)
Core PCE inflation forecast for 2018 unchanged at 1.9%, for 2019 raised to 2.1% (up fro 2.0%), for 2020 raised to 2.1% (up from 2.0%).
- While unemployment rate would continue to drop, GDP growth to stay solid, inflation will pressure will remain contained. Fed is seeing the current pattern to continue.
Federal funds rate projection for 2018 unchanged at 2.1%, 2019 raised to 2.9% (up from 2.7%), 2020 raised to 3.4% (up from 3.1%).
- This is possibly what disappointed dollar bulls most. It implies Fed will stick with the course of only three rate hike this year. There might be one more hike in 2019 to three in total, thanks to the GDP growth in both 2018 and 2019, as well as the steep improvement in labour market. And, Fed is more confident that there will be another two rate hikes in 2020.
