- All but one dovish dissenter voted for today’s rate increase.
- The statement remained upbeat on the economy, noting moderate growth, solid job gains, rising consumer spending and firming business investment.
- There was no change in forward guidance on interest rates or the Fed’s reinvestment policy.
- Median economic projections and the ‘dot plot’ were little changed, the latter amid some expectation that the Committee might see a slightly faster pace of rate hikes as appropriate next year.
Our Take:
A favourable assessment of current economic conditions and confidence that the outlook remains bright underpinned Chair Yellen and her colleagues’ decision to raise the funds target by 25bps. This marked the third rate hike this cycle and the shortest period between increases at just three months. The FOMC remains confident that the economy will continue to grow, labour market conditions to tighten somewhat further and inflation to stabilize at its 2% objective even as they gradually raise the policy rate. This confidence was evident in the forecast supplied with the statement that showed the median growth forecast at 2.1% in both 2017 and 2018 – solidly above the 1.8% longer run estimate – even with policymakers anticipating another two rate hikes to be delivered this year and three next year. Once again, the statement made no mention of any lift from fiscal policy suggesting upside risks to the Fed’s forecast should the Trump Administration deliver on their campaign promises of tax cuts and lighter regulations.
We remain confident that the US economy will grow at an above-potential pace. Early data for the first quarter points to growth running at about a 2% annualized pace – enough to exert further downward pressure on the unemployment rate. However, given the elevated level of uncertainty about the direction of fiscal policy, the Fed is likely to keep on the path of gradual rate hikes. A dose of stimulus with the economy already running close to its speed limit could be a recipe for a faster-than-desired pickup in inflation and require a more aggressive response by the Fed. However until there is clarity on the Administration’s game-plan, the Fed’s strategy will remain the slow and steady removal of accommodation.
