“As widely expected, the FOMC decided to hike the target range for the federal funds rate by 25 bps. The IOER rate was raised by 25 bps as well. The reinvestment cap of the balance sheet normalization program rose to $50bn/month ($30bn for treasuries and $20bn for agency debt and MBS), according to schedule,” note Rabobank analysts.
Key quotes
“While the median rate path in the FOMC projections for 2018-2020 remained unchanged, there is now a large majority for 4 hikes in 2018 versus 3 hikes: 12-4. In June, there was only a marginal majority of 8-7. So the FOMC expects one more hike this year, followed by 3 in 2019 and 1 in 2020. The forecasting horizon was extended to 2021, but the FOMC expects to remain on hold that year. The longer run federal funds rate was raised slightly to 3.0% from 2.9%, but that still means that the FOMC expects to be in restrictive territory by the end of 2019 and through 2020-2021.”
“The economic forecasts were tweaked slightly. Most notably GDP growth for 2018 was raised to 3.1% from 2.8%, justified by strong economic data in Q2 and Q3. GDP growth for 2019 was raised to 2.5% from 2.4%. The unemployment rate for 2018 was raised to 3.7% from 3.6%. PCE inflation for 2019 was reduced to 2.0% from 2.1%, but core inflation forecasts remained unchanged.”
“The extension of the projections to 2021 revealed that the FOMC expects GDP growth to slow down to its longer run rate of 1.8%, unemployment to rise after 2020 and (both headline and core) inflation to remain unchanged at 2.1%.”
“The FOMC removed the phrase that ‘the stance of monetary policy remains accommodative’ from its formal statement, but Powell said that this did not signal a rate path change. In fact, it shows that everything evolves in line with expectations. Powell said that it is still accommodative, but we do not need to stress that anymore. Also the FOMC does not know exactly where neutral is. Now that the target range is 2.00-2.25% we are apparently close enough the FOMC’s estimate of the neutral level of 3.0% to drop the ‘accommodative’ phrase. Note that the median rate forecasts remained unchanged, so we agree that not too much should be made of this.”
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