FOMC Decision – Inching Closer to Neutral
by Craig Dismuke, Dudley Carter
As expected, the FOMC hiked its overnight target rate range 25 basis points to 2.25-2.50%, the ninth hike of the cycle and the fourth of 2018. They also raised the interest on excess reserves rate 20 basis points to 2.40% in a continued effort to manage the effective Fed Funds rate nearer the median of their rate range.
The Official Statement was largely unchanged, although two of the minor changes are worth noting. Regarding future rate hikes, the Statement was changed from saying that “further gradual increases” were expected to “some further gradual increases,” indicating that they are closer to their eventual stopping point. Additionally, the assessment that “risks to the economic outlook appear roughly balanced” was conditioned with the phrase that officials “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” As such, the recent deterioration in global economic data is on the FOMC’s radar as it relates to future policy decisions.
The majority of the changes in the official release were seen in the Summary of Economic Projections. Participants lowered their GDP growth forecasts, longer run NAIRU rate, and inflation projections. The economy is now expected to expand 2.3% in 2019, down from 2.5% in the September SEP. As for the unemployment rate, Participants now project the longer run rate to be 4.4%, down from 4.5%. This indicates that the Fed now believes the unemployment rate can be as low as 4.4% without generating excessive inflation, a small acknowledgement that the Phillips Curve is flatter than they have historically believed. As for inflation, PCE is expected to end 2018 and 2019 at 1.9% YoY, down from previous forecasts of 2.1% and 2.0%, respectively. Core PCE is also expected to be slightly weaker at 2.0% in 2019, 2020, and 2021; all down 1/10th from September’s projections.
With weaker GDP growth, less inflation, and a lower NAIRU rate; it is logical that the Fed lowered its projections for interest rates. The median forecast in September called for three rate hikes in 2019, one hike in 2020, and a longer-run neutral rate of 3.00%. December’s median forecast shows one less hike in 2019 and a longer-run neutral rate of 2.75%. As such, as 2.20-2.50%, the Fed’s target rate range is now one hike from the longer-run neutral rate.
With a slightly more-hawkish-than-expected Official Statement but a dovish set of economic projections, Fed Chair Powell’s press conference will swing the decision in whichever direction he chooses.
FOMC Official Statement
December 19, 2018
Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators 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 Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.
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 2-1/4 to 2-1/2 percent.
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 maximum employment objective and its symmetric 2 percent inflation objective. 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.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.