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Analysts at CIBC still see the Federal Reserve moving towards taking a more cautious approach to monetary policy than the one projected in the statement. They expect a slower US growth profile.

Key Quotes:  

“The FOMC came together, saw that the economy was still strong, and hiked rates 25bps for the third time this year. No surprise there. Guidance for the near-term trajectory of interest rates, in terms of the dot plot and statement language, was also little changed. However, guidance for longer term interest rate prospects appeared somewhat confused, with the statement dropping the phrase that “monetary policy remains accommodative”, but the “longer-term” interest rate projection actually moving up slightly.”

“The Fed’s longer term projections for interest rates differ quite a bit from ours, because we’re unconvinced that the Fed can keep raising interest rates further above neutral in 2020 when fiscal policy turns from being a tailwind to a headwind. Indeed, with fiscal policy by 2020 likely to be shaving about 0.7%-pts from GDP, having added about the same amount in 2018 and 2019, growth could see quite a notable slowdown and interest rate cuts could be in the cards.”

“We expect a much slower growth profile than the median of FOMC projections which today were actually upgraded slightly, not just for 2018 (3.1% from 2.8%) but also 2019 (2.5% from 2.4%). While the 2% median forecast for 2020 was unchanged from the June projections, it’s still quite a long way above our forecast.”

“We still see the Fed moving towards taking a more cautious approach to monetary policy than projected in the statement, given the magnitude of the expected fiscal drag in 2020 which will likely push the unemployment rate up.”