As expected, the Federal Open Market Committee (FOMC) decided to raise the target rate for the federal funds rate a quarter point to 2.25-2.5%. That marks the ninth quarter-point increase since late 2015.
The statement’s characterization of the economy was broadly unchanged from their previous statement. “The labor market has continued to strengthen and…economic activity has been rising at a strong rate.” Indicators of longer-term inflation expectations are characterized as little changed, on balance.
The key change that everyone was watching for was quite minor. The committee “judges that some (emphasis added) further gradual increases in the target range for the federal funds rate will be required”. The only change is the addition of the word “some”. In a nod to recent market weakness the statement also added that while the risks remain balanced, the Fed “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
There is no precise definition of how many “some” is, but it is clear that the fed’s dot plot, which shows members expectations for future rate increases, did shift lower for 2019. The median expectation is now for two hikes in 2019, rather than three indicated in September. The median expectation for the longer-run level of the fed funds rate also moved down to 2.75% from 3.00%.
These lower rate expectations were consistent with a modest downgrade to growth and inflation. Relative to the previous Summary of Economic Projections in September:
- The median projection for real GDP growth in 2019 declined to 2.3% (from 2.5%). The forecast for 2020 was unchanged (at 2.0%). Notably the expectation for growth over the longer run moved up slightly, from 1.8% to 1.9%.
- The median unemployment rate forecast was unchanged through 2019, but both 2020 and 2021 were revised up one tenth, likely reflecting slightly lower growth. The longer run estimate of the unemployment rate was also moved down a tick 4.4% (from 4.5%)
- On inflation, the median estimate for core PCE was also moved down a tick in 2018 to 1.9% (from 2.0%) and at 2.0% in 2019 (down from 2.1%).
Key Implications
Today’s rate hike was widely expected, but the language of the statement and the economic outlook is what everyone was really waiting for, specifically how the Fed would incorporate the recent market downturn and softer inflation readings into their outlook. The answer is pretty clear: the outlook is weaker, and on balance the Fed expects to raise rates fewer times than they did back in September. The median dot now calls for two hikes, in line with our own forecast.
Treasury yields were up slightly in the immediate aftermath of the statement, with market participants perhaps a bit relieved that the Fed is likely to be even more gradual with rate hikes going forward, and therefore less likely to trigger a downturn by hiking too much. We await the press conference to get more color from Chair Powell on the thinking behind the slight downgrade in view.
