Fed Raises Fed Funds Rate as Widely Expected
• The FOMC voted today to increase the fed funds rate range to 1.75-2.00 percent.
• The Fed’s expectations for interest rates in 2018 and 2019 have increased marginally.
The Federal Open Market Committee voted today to increase the fed funds rate range to 1.75-2.00 percent. The rate hike was widely anticipated and appears to be easily digested by financial markets. In their policy announcement, the FOMC said that economic activity has been rising at a solid rate, household spending has picked up and business investment has continued to grow strongly. The vote to raise the fed funds rate was unanimous.
The Fed removed the forward guidance in its policy announcement, which had previously stated that the fed funds rate would likely remain below its long-term expected rate for some time. This reflects the Fed’s view that after recent rate hikes, the fed funds rate is now closer to its long-term expected rate.
The FOMC also voted to increase the interest rate paid on excess reserves by 20 basis points, to 1.95 percent.This is 5 basis points below the normal spread. The Fed hinted at this in their last set of minutes, saying that the correction in the spread was necessary to better manage the effective fed funds rate in the middle of the target range.
The FOMC released a new set of economic projections and a new “dot plot” today. FOMC members’ median projections for real GDP growth for 2018 ticked up to 2.8 percent, from 2.7 in the March 21 economic projections. Likewise, the median unemployment rate projection for 2018 ticked down from 3.8 percent in March to 3.6 percent. Inflation expectations warmed up. FOMC member’s median projection for the PCE inflation rate for 2018 increased from 1.9 percent in March to 2.1 percent. The expectation for slightly stronger economic growth in 2018 and slightly higher inflation is consistent with a fourth fed funds rate hike this year.
The new dot plot shows a marginal upward shift in FOMC members’ expectations for the fed funds rate at the end of this year and for the end of 2019. This points to the increased likelihood of a fourth rate hike this year, likely coming on December 19.
In his post-meeting press conference, FOMC Chairman Jay Powell said that he will have a press conference after every FOMC meeting beginning in 2019. Powell said that this does not signal policy changes, but rather it reflects his desire to communicate effectively.
Chairman Powell said that U.S. fiscal policy will provide a meaningful support to economic demand. He said that recent trade policy issues are a risk factor for the economy.
Market Reaction: U.S. equity prices were mixed following the Fed policy announcement. The 10-year Treasury yield increased to 2.97 percent. NYMEX crude oil ticked up to $66.73 per barrel. Natural gas futures were little changed at $2.96/mmbtu.
For a PDF version of this report, click here: FOMCPolicyAnnouncementandSupporting Materials
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