Consistent with market expectations, the Federal Open Market Committee (the FOMC) elected to raise rates this month – by 0.25%.
This month Chair Yellen and the FOMC were faced with a Mario Draghi-like challenge – the near impossibility of meeting the market’s expectations for a dovish hike. The Fed’s statement attempts to thread the needle by suggesting limited future hikes while justifying the current hike. Immediate market reaction suggested that the Fed was fairly successful; the 10-year firmed by 3 bps.
We can break the Committee’s statement into three parts:
• Economic Assessment – the statement highlighted further improvement in job gains, but acknowledged that inflation compensation remains low and inflation expectations declined.
• Outlook – the committee described the risks to its outlook as ‘balanced’, a change from ‘nearly balanced’. Describing the risk as balanced is supportive of the hike, and is consistent with the language used at the beginning of previous rate hike cycles.
• Forward Guidance – the Fed now describes the potential timing of future rate hikes as ‘at future meetings’ vs. ‘at its next meeting’, a more dovish time frame. The FOMC used the word ‘gradual’ twice in its statement, and also stressed that monetary policy remains accommodative.
This month, we also received updated ‘dot plots’ – the FOMC’s Summary of Economic Projections. Like the statement, the dots suggested continued tightening, but at a slower pace. The median projections for the Fed Funds rate were unchanged for 2016 and for the longer run, but were lower by .25% in 2017 and by .125% in 2018.