Instant Analysis: FOMC delivers on rate hike; statement and dot plot turn hawkish
The Federal Open Market Committee (FOMC) delivered on its seventh rate hike in this tightening cycle that began in December 2015 with another 25-basis-point rate hike today. As expected, the fed funds target rate increased to between 1.75% and 2.00%. The Fed followed that up with shifts in the median dot-plot that moved forward its rate hike expectations for this year from three to four rate hikes.
The breakdown in the individual forecasts remains a close call, with seven participants expecting three or fewer rate hikes this year and eight participants see four or more rate hikes this year. The median forecast for 2019 remains at three additional 25-basis-point hikes with one additional hike expected in 2020.
In short, the Fed’s rate hike today and revised economic and interest-rate projections and statement paint a FOMC that is becoming a lot more confident in the sustainability of economic activity in the face of rising interest rates and getting more concerned about the potential for low unemployment and rising inflation to generate some overheating. Summing up the mood of the FOMC perfectly, Chairman Powell opened his press conference today with, “The economy is doing very well. People are getting jobs who want jobs, and the unemployment rate and inflation remain low.” While acknowledging downside risks to growth from global trade disputes, he didn’t spend a lot of time dwelling on it, and also noted that fiscal policy is currently adding to growth.
The FOMC statement also removed the forward guidance that “the fed funds rate is likely to remain, for some time, below the levels that are expected to prevail in the long run.” The statement also upgraded the FOMC assessment of economic growth to “solid” from “moderate,” and noted that household spending has picked-up and unemployment rate has declined since the last meeting. They also raised their assessment of inflation, taking out the language “the market-based measures of inflation compensation remain low.”
Chairman Powell also announced a stepped-up schedule of press conferences starting in January 2019. A press conference will now go along with every FOMC meeting, while economic and interest rate projections will still only be revised on a quarterly basis.
In a technical note, Chairman Powell noted that the interest rate on excess reserves (IOER) would be adjusted 5 basis points below the top of the fed funds target range in order to better keep the effective fed funds rate toward the middle of the target range.
Consistent with a more aggressive near-term rate hike path, the FOMC median economic projections revealed a lower unemployment rate and higher inflation rate through 2020 than those forecast in March. At the same time, real GDP growth for 2018 was revised a tenth of a percentage point higher to 2.8% from 2.7%.
For now the Fed is throwing caution to the wind and is pressing ahead with steady rate hikes this year, despite growing downside risks from trade. Acknowledging this shift in thinking at the Fed, we now expect a quarter-point rate hike from the FOMC at the September and December meeting, but maintain our forecast for only one rate hike in 2019. We remain concerned that growth could slow swiftly should the Fed overtighten into 2019 and beyond. Rising interest rates will begin to weigh more on durable goods spending, including autos and housing in the quarters ahead.
The Treasury bond market got caught flat-footed with yields rising across the board, following the FOMC’s actions today, however the yield curve continued to flatten with the 2-10 spread narrowing to 41.0, down 1.4 basis points from yesterday. Stocks lost ground, but the selloff remained orderly with the Dow down 0.45% and the S&P 500 down just 0.23%.