Fed Hikes as Outlook Improves
by Craig Dismuke, Dudley Carter
The FOMC voted to hike rates for the sixth time of this cycle, bringing the target Fed Funds range up to 1.50-1.75%. The Committee’s Official Statement noted weaker results to start 2018, but an improved outlook going forward. The economic projections were somewhat confounding in that they noted faster growth, an even tighter labor market, but largely unchanged expectations for inflation. Additionally, the Fed’s dot plot reflected higher expectations for Fed Funds in future years but continued to project just three hikes in 2018. The decision to raise the target rate range was without dissent.
The Committee’s assessment of the current economic environment was qualitatively weaker, noting that economic activity has been rising at a “moderate” rate rather than a “solid” rate, as described in the January Statement. It went on to note that “household spending and business fixed investment have moderated from their strong fourth-quarter readings.” However, these were the only weaknesses seen in the Fed’s cumulative release. While the 2018 data may have been weaker thus far, the Committee’s expectations for future activity have improved. The Statement noted , “The economic outlook has strengthened in recent months.” In addition, the Statement was revised to point to inflation firming up in “coming months” rather than “this year”.
In the Fed’s Summary of Economic Projections, participants marked their GDP growth projections up from 2.5% to 2.7% for 2018, and from 2.1% to 2.4% for 2019. The longer-run GDP growth expectation remained 1.8% implying that the economy is expected to further outpace what is sustainable over the next two years. Additionally, the unemployment rate projections were revised lower from 3.9% to 3.8% for 2018, from 3.9% to 3.6% for 2019, and from 4.0% to 3.6% for 2020. Participants believe the longer run sustainable unemployment rate is 4.5%, revised down from 4.6%. As with the GDP projections, the unemployment projections point to an even tighter labor market than is sustainable longer term. Interestingly, the inflation projections were on fractionally affected by the notably stronger outlook. PCE inflation is expected to average 1.9% in 2018 and 2.0% in 2019, both unchanged from December’s projections. Core PCE inflation is now expected to average 2.1% in 2019, a 0.1% increase from December’s projections. Of lesser impact, the central tendencies (reflecting the range of forecasts from all participants excluding outliers) for both headline and core PCE were revised up by 0.1% for 2018, 2019, and 2020.
Also in the SEP, the dot plot was revised to reflect higher rate projections from many participants. Seven of the fifteen participants now expect the Fed Funds range to end 2018 25 bps higher than in the December projections. Despite that, the median forecast from all participants continues to call for the range to end 2018 at 2.00-2.25% (3 hikes total). The median forecast for year-end 2019 increased from 2.69% to 2.875%, implying three rate hikes in 2019 rather than two. The median year-end 2020 rate increased from 3.06% to 3.38%, implying one additional rate hike. While the gradual pace was affirmed in the Fed’s projections (for now), it now appears that the Fed is expecting to continue hiking for a slightly longer period.
Bottom line: The Fed expects growth to be notably better than they believed in December. They expect the labor market to tighten even further and inflation to move back to their 2% target sooner than they did in January. However, they continue to expect inflation to remain moderate, allowing them to continue on a gradual path of policy normalization.
March 21, 2018
Federal Reserve issues FOMC statement
Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.