Instant Analysis: Fed raises rates at March meeting

Scott Anderson
Posted by Scott Anderson
Chief Economist

The Federal Reserve raised the fed funds target rate range today by a quarter percentage point to 0.75 to 1.00% from 0.50 to 0.75%, as expected.

Close up of the Federal Reserve building with the eagle statueThere was one dissent in the Federal Open Market Committee (FOMC) decision, as Neel Kashkari preferred to maintain the existing target range for the Fed funds rate.

The move by the FOMC today had more to do with the cumulative progress the Fed has made on its dual mandate of full employment and stable prices over the past three months, rather than a wholesale revamp of their growth, inflation, or interest-rate expectations going forward.

The FOMC statement released today slightly upgraded its assessment of current business investment, noting that business investment “appears to have firmed somewhat.”

On inflation, the FOMC statement noted that inflation has increased in recent quarters, “moving close” to the Committee’s 2.0% longer-run objective.

Despite the early start to Fed rate hikes this year, the release of the latest economic and interest rate projections from the Fed revealed only minor tweaks in FOMC median expectations through 2019.

No dramatic changes on horizon

Today’s decision to raise the fed funds rate does not signal that the FOMC is off to the races on aggressive interest rate hikes over the next three years. Investors and analysts looking for dramatic changes in the Federal Reserve’s inflation outlook or the median FOMC rate path at today’s meeting will be sorely disappointed.

Median FOMC dot-plot holds closely to the gradual rate hike path laid out in December. FOMC median forecast is expecting three quarter-point rate hikes this year and in 2018 and 2019.

The FOMC median forecast is still anticipating approximately a 2.0% real GDP growth environment through 2019.  The median GDP forecast for 2018 was revised up a mere 0.1% for 2018.  The GDP forecasts for 2017, 2019, and the long run were unchanged.  There is no “Trump bump” factored into the Fed’s median forecasts.

The unemployment rate outlook is unchanged through 2019, though the long-run forecast was marked down by a tenth of percentage point to 4.7% from 4.8% at December’s meeting.

The headline PCE inflation outlook is unchanged through 2019 and in the long run. Core PCE inflation median forecast moved higher by a tenth of percentage point today to 1.9% from 1.8% forecast back in December.  Forecasts of core inflation for 2018 and 2019 were unchanged.

Market reaction

Bond market reaction was swift with 10-year Treasury yields falling about 10 basis points to 2.5%. The S&P 500 was trading about a half a percentage point higher, the U.S. dollar was weaker, and oil prices were on the rise.

Today’s FOMC decision does not change my forecast for three quarter-point Fed rate hikes in 2017. I expect the next fed funds rate hikes in September and December this year, and forecast three more rate hikes in 2018. This is still a gradual rate hike path compared to history, but a somewhat stepped-up pace from what we have seen from the Fed over the past two years.

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