Fed Baseline is Three Rate Hikes for 2018

One question prior to the Fed announcements today was how well the markets would receive Fed Chair Jerome Powell’s first monetary policy statement given the recent volatility in the stock and bond markets. Shortly after the announcement, we can say that there was no shock, surprises or extraordinary volatility. Needless to say, without a volatile reaction, it’s hard to tell if we can call the Fed hawkish or dovish, however, the central bank’s language has me leaning towards the hawkish side.

On Wednesday, the Federal Open Market Committee, the decision-making arm of the U.S. Federal Reserve, approved a widely expected 25-basis point rate hike that raised the central bank’s benchmark rate at a target of 1.5 percent to 1.75 percent.

In addition to raising rates, the Fed upgraded its economic forecast, and hint that the path of rate hikes could be more aggressive. The market currently expects three hikes for 2018, and that remained the baseline forecast, but at least one more increase was added in the following two years.

“The economic outlook has strengthened in recent months,” the committee said in its post-meeting statement, a sentence that had not been in previous releases. The language came even though the committee earlier in the statement said “economic activity has been rising at a moderate rate,” a seeming downgrade from January’s characterization of a “solid” rate.

The decision to increase the funds rate came unanimously even though some members have questioned why the Fed is moving absent more inflationary pressures.

The FOMC raised their forecast for 2017 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2018 expectation from 2.1 percent to 2.4 percent.

However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent.

Finally, the Fed’s inflation expectations were little changed. The 2018 forecast remains just 1.9 percent for both core and headline inflation. Fed officials now see unemployment running even lower than before. Currently, at 4.1 percent, officials now see the rate for 2018 at 3.8 percent, down from the 3.9 percent December forecast, and 2019 falling all the way to 3.6 percent from the original 3.9 percent.

In summary, the Fed’s dot-plot forecasts leaned towards the hawkish side. Three rate hikes is the baseline for 2018, however, we can see as many as three rate hikes in 2019, up from two. The funds rate for 2020 is now expected to be 3.4 percent from the initial 3.1 percent, though the longer run forecast rose just a bit, from 2.8 percent to 2.9 percent.