Wednesday, March 21, 2018

Fed raises rate 25 bps, sees 3 hikes in 2018 and 2019

     The Federal Reserve, the U.S. central bank, raised its benchmark federal funds rate by another 25 basis points to 1.5 - 1.75 percent, as widely expected, and retained its forecast for raising the rate by a total of three times this year and also expects to raise the rate three times in 2019.
      The Federal Reserve has now raised its rate six times since December 2015 and by a total of 150 basis points as the rate increases to a level not seen since October 2008 when the Fed was slashing its rate in response to the deepening global financial crises. 
      "The economic outlook has strengthened in recent months," the Fed's policy-making arm said, adding near-term risks to its outlook still remained balanced but it is monitoring inflation carefully.
      Today's decision by the FOMC, which for the first time was chaired by Jerome Powell who took over from Janet Yellen in February, was unanimous.
       In an update to its economic forecast, the median projection of the fed funds rate this year was unchanged from the December forecast at 2.1 percent, up from 1.4 percent in 2017, implying three rate hikes of 25 basis points each.
       But for 2019, when tax cuts and higher federal spending will continue to propel economic growth, the FOMC now projects a fed funds rate of 2.9 percent, up from 2.7 percent seen in December, implying another three rate hikes.
       In 2020 the fed funds rate is seen averaging 3.4 percent, up from 3.1 percent, implying two rate hikes.  The longer-run fed funds rate was raised to 2.9 percent from 2.8 percent.

       Since the Fed's December projections, the U.S. Congress has not only passed personal and corporate tax cut worth $1.5 trillion over 10 years, but also lifted Federal spending by $300 billion over two years.
       Earlier this month Fed Governor Lael Brainard said many of the forces that had acted as headwinds to U.S. growth were now generating tailwinds and the change in fiscal policy from restraint to substantial stimulus was at a time when the economy is already close to full employment.
       She said the tax cuts were estimated to boost GDP growth by as much as 0.5 percentage points this year and 2019 while the budget deal to raise spending by around 0.4 percent of GDP in each of the next two years.
      The FOMC raised its forecast for economic growth this year to 2.7 percent from a previous 2.5 percent and the 2019 forecast to 2.4 percent from 2.1 percent. The 2020 forecast was unchanged at 2.0 percent.
      And while unemployment is seen falling faster than earlier projected, the forecast for inflation was largely unchanged, averaging 1.9 percent this year, 2.0 percent in 2019 and 2.1 percent in 2020.
      In the fourth quarter of 2017 US Gross Domestic Product grew by an annual rate of 2.5 percent, up from 2.3 percent in the third quarter while the unemployment rate was unchanged for the fifth month in a row of 4.1 percent in February.
      Inflation, as measured by the Fed’s preferred gauge of the personal consumption expenditure has been steady in the last three months at 1.7 percent.
      The FOMC sees the jobless rate dropping to 3.8 percent this year, down from 3.9 percent seen in December, and then to 3.6 percent in 2019 and 2020, respectively.


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

"Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but 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 economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
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 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong 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 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams."


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