FOMC Hikes, Projects 4th Hike in 2018, Sees Slower Growth and Rise in Unemployment in 2021
by Craig Dismuke, Dudley Carter
The FOMC voted unanimously to hike its target rate range to 2.00-2.25%, its eighth rate increase of the cycle and the first time the target rate has been over 2.00% since April 2008. In its implementation note, the Committee increased its balance sheet roll-off, as planned, to allow $50 billion per month in roll-off, $30 billion in Treasury securities and $20 billion in MBS. According to the originally prescribed plans, this is expected to be the maximum portfolio roll-off allowed going forward.
As for the FOMC’s Official Statement, there were remarkably few changes to strong assessment from the August Statement. The only changes were mechanical in nature with one exception, the Committee no longer considers policy to be “accommodative.” Some analysts have taken this to mean that a pause in rate hikes may be near; however, the Fed’s rate projections in their Summary of Economic Projections argues against this belief.
In the Summary of Economic Projections, FOMC opinion has coalesced around four rate hikes for 2018, up from the expected three hikes coming into the year. As of today’s SEP, 12 of 16 participants expect to hike again in December bringing the target range to 2.25-2.50% by year-end. Median projections for 2019 and 2020 remained unchanged at 3.00-3.25% and 3.25-3.50%, respectively, despite what appears to be five participants lowering their 2020 projections. As such, Fed officials are expecting one more hike in 2018, three hikes in 2019, and one final hike in 2020. Today’s SEP marks the first look at 2021 projections and participants expect the overnight range to remain at 3.25-3.50%, implying that this is the expected peak range for the overnight rate. The median longer run rate did bump up from 2.875% to 3.00%, but not because participants raised their projections. In fact, three participants lowered their longer-run projections and only one raised their projection. Instead, new Fed Governor Clarida added one projection to the high side of the median, causing the median to bump higher.
Also in the Summary of Economic Projections, GDP growth is now projected to be stronger in 2018 and 2019 than previously projected. The economy is expected to grow 3.1% in 2018 (up from 2.8%) and 2.5% in 2019 (up from 2.4%). While shorter term growth is expected to be stronger, the 2021 projections show growth slowing to 1.8%. Unemployment is expected to begin rising in 2021 but inflation is expected to remain in-check at 2.1%. This marks the first forecast since the Dot Plot was introduced in 2012 in which the unemployment rate is projected to rise at a future date.
September 26, 2018
FOMC Official Statement