FOMC raises rates, two more hikes still seen in 2018
By Alexander Bueso
Date: Wednesday 21 Mar 2018
(ShareCast News) - The US central bank tightened policy on Thursday, as expected, amid a modest upwards shift in policymakers' own expectations for the path of official interest rates in 2019 and 2020.
Yet roughly one hour after the close of Wall Street, the yield on the policy-sensitive benchmark two-year US Treasury note yield was trading four basis points lower at 2.31%, while that on the 10-year note had declined by just one basis point at 2.88%, in what fixed income traders term a 'bull steepening' in the Treasury yield curve.
Initially, bond yields had in fact moved higher. Having said that, the US dollar spot index was lower from the 'get-go'.
After two days of deliberations, the Federal Open Market Committee raised the target range for the benchmark policy rate, the so-called Fed funds rate, by 25 basis points to between 1.5% and 1.75%.
Also as expected, the median of US rate-setters' projections, contained in the Summary of Economic Projections published alongside the FOMC's policy statement, continued to point to only two more hikes in 2018 - not three more.
However, as economists quickly picked-out, while the median dot contained in the SEP's 'dot-plot' graph was unchanged, various members did shift their individual forecast higher, so that it would suffice for just one more policymaker to shift his dot higher at the next meeting for the median projection to rise to three more hikes.
On the FOMC's comunique
In its statement, the FOMC, the central bank's main decision-making body, described job gains in recent months as "strong", with consumption and investment having moderated after "strong" fourth quarter readings.
On inflation, it said that market-based measures of inflation compensation had risen but remained "low", whereas longer-term survey-based readings on inflation expectations were "little changed".
Going forward, "near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely," the FOMC said.
Economic growth over the medium-term was seen remaining "moderate", alongside a "strong" labour market, with inflation seen stabilising around the central bank's 2% target.
"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," the statement read.
Wednesday's decision to raise the Fed funds rate was taken by a unanimous vote.
On to Powell's Q&A ...
As the new Fed chairman, Jerome Powell, began reading a brief statement outlining the current macroeconomic backdrop, the yield on the benchmark 10-year US Treasury note was three basis points higher at 2.93% - just off its intra-day high - before later falling back.
In particular, and perhaps explaining part of the market reaction, some commentators highlighted his remark that policy-makers's so-called 'dot-plot' projections might rise, or they could fall.
Powell himself also appeared to emphasise that "we're always going to be seeking 2% inflation".
At one point, he also indicated that "[we are] trying to take a middle ground on rates".
Parsing the SEP: Modest to moderate rise in projections for Fed funds rate in 2019 and 2020
When looking at the new median predictions from the Fed Board's members and regional Fed presidents, those for the path of the Fed funds rate out to 2020 were revised only slightly higher, by two-tenths of a percentage point and three-tenths of a percentage point, to 2.9% by year-end 2019 and 3.4% at year-end 2020, respectively.
However, the central tendency of those projections, which eliminate the three lowest and highest forecasts, and the full range of projections was revised higher by more.
The top end of the range of estimates for 2020, in particular, shifted sharply higher, but only as the result of one outlier.
Indeed, to the surprise of some analysts, the central tendency for estimates of where the Fed funds rate should be in the "longer run" was unchanged at between 2.8% and 3.0%.
On the flip-side of that equation, rate-setters also bumped up their GDP projections, particularly for this year and next.
The central tendency for 2018 rose from between 2.2% to 2.6% to between 2.6% and 3.0%.
For 2019, it was improved from between 1.9% to 2.3% to between 2.2% to 2.6%.
Analysts weigh in [...] some see interest rate cuts on policy horizon
Towards one end of the spectrum of analyst opinion, Michael Pearce at Capital Economics said: "Fed officials now anticipate a (very modest) overshoot in inflation over the next few years, the first time they have done so since they began publishing economic projections in 2007.
"[...] While the median forecast for this year remained three rate hikes, the number of officials anticipating four rate hikes doubled to six."
However, in a research report sent to clients he then went on to add: "Once the fiscal boost fades and job growth slows, we expect economic growth will fall below trend, prompting the Fed to begin cutting rates again in 2020, a strongly non-consensus call."
For his part, Marvin Loh at BNY Mellon commented: "Our view is that the FOMC wanted to sound hawkish and tried to do so in the least disruptive manner possible. The 2018 dots did not change, although they gave themselves optionality in that it would take only one voter moving from three hikes to four in order to push the median higher.
"While the FOMC reports the median results of its votes, it is worth noting that the average for 2018 was 14 bps higher versus the December meeting.
"In looking at the 2018 dots dispersion, there were two contributors who felt only two hikes were likely this year."
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