Federal Reserve: Onwards and upwards

As almost universally expected the Federal Reserve has decided to raise the Fed funds target rate range another 25 basis points to 2-2.25%. The accompanying statement has dropped the sentence that described the Fed’s monetary stance as “accommodative”, but hasn’t replaced it with any other descriptors. However, the Fed continues to expect that “further gradual increases” in the policy rate will be required for them to achieve their growth, labour market and inflation mandate. There were no other changes to the text with activity and job gains still described as “strong” while inflation remains near target.

The Fed has updated is economic projections though, with an extra “dot” in the form of new Fed Vice Chair Richard Clarida. GDP growth expectations for 4Q18 have been upped to 3.1% from 2.8% in June while the 2019 forecast has been raised a tenth of a percentage point to 2.5%. The forecast range has been extended to 2021, which is expected to see growth of 1.8%, down from 2% in 2020. This 1.8% figure is in line with the Fed’s longer-run growth expectation. These projections are broadly in line with our own forecasts.

Inflation forecasts have barely changed and point to ongoing outcomes close to 2%. Unemployment projections are also broadly unchanged with 3.5% expected to be the low through 2019 and 2020.

As such the Fed continues to predict a central rate of 2.4% for end 2018 – implying one more rate rise this year. While 2019 is pencilled in at 3.1%, implying three rate rises and 2020 is at 3.4%. This appears to be the peak with the new 2021 prediction also 3.4%. However, the Fed has bucked the recent trend of cutting its longer-run projection and actually nudged it up to 3%.