Wednesday, March 15, 2017

Fed hikes rate 25 bps, still sees two more hikes in 2017

    The U.S. Federal Reserve raised its benchmark federal feds rate by 25 basis points to 0.75 - 1.0 percent, as expected by practically everyone, and maintained its forecast for another two rate hikes this year as it expects inflation to stabilize around its 2.0 percent target.
    The central bank of the United States has now raised its rate three times since December 2015 - when it raised the rate for the first time since July 2006 - and said today's rate rise reflected improved conditions in the labour market and a rise in inflation to close to its long-run objective.
    Although the Fed maintained its forecast for the fed funds rate to reach 1.4 percent this year, 2.1 percent next year and 3.0 percent in 2019, it signaled that it could increase the size of the rate hikes from 25 basis points by altering the wording in its statement.
    "The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate," said the Federal Open Market Committee (FOMC),  omitting the word "only" gradual increases from its previous statement in February.
    However, the FOMC also reiterated that its policy stance remains accommodative to help the labour market strengthen further while there is a "sustained return to 2 percent inflation," signaling that it will see through any short-term increases in inflation to above 2 percent.
     In its statement, the FOMC repeated that job gains had been solid and the unemployment rate little changed, but that business fixed investment "appears to have firmed somewhat," an upgrade from its February statement when it said investments had "remained soft."
    The forecast for economic growth in the United States was also largely unchanged from December, with growth this year seen of 2.1 percent, then 2.1 percent in 2018, slightly up from 2.0 percent, and 2019 growth of 1.9 percent.
    The unemployment rate was seen averaging an unchanged 4.5 percent this year, in 2018 and 2019 while inflation, as measured by the personal consumption expenditure, was seen unchanged at 1.9 percent this year, and 2.0 percent in the following two years.
    Headline inflation in the U.S. rose to 2.7 percent in February, the seventh month of accelerating inflation, while core inflation, which excludes food and energy, eased to 2.2 percent.
   The U.S. unemployment rate dropped to 4.7 percent in February while the economy grew by an annual rate of 1.9 percent in the fourth quarter of last year, up from 1.7 percent in the previous quarter.
    Unlike its last rate hike in December 2016, when all 10 members of the FOMC unanimously agreed to raise the rate, one member objected to today's hike. Neel Kashkari, president of the Minneapolis Fed, voted to maintain the rate.

    The Board of Governors of the Federal Reserve System released the following statement:

"Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. 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 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate."


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