Following the US Federal Reserve’s (Fed) announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (the FOMC) increased the Fed Funds rate by 25 basis points to 0.75%‐1%. In addition to the rate increase and FOMC Statement, Fed members updated their Summary of Economic Projections. Chair Yellen also hosted her quarterly press conference.
The March Statement indicated that continued improvement in the US labor market and realized inflation over the intra-meeting period justified a rate increase. The FOMC continues to characterize the path of future rate hikes as gradual.
The market was more focused on the Summary of Economic Projections as the rate hike was well telegraphed by FOMC members prior to the meeting. The growth outlook was unchanged while the inflation outlook was only modestly altered in 2018. The famous Dot Plot was basically unchanged and certainly less hawkish than some investors had feared.
We can break the Committee’s statement into three parts:
There was one dissenter at the meeting, Minnesota President Neel Kashkari who preferred to wait before hiking.
The Summary of Economic Projections showed minimal changes on the economic front. The FOMC did upgrade their expectations for GDP in 2018 and the long-run unemployment by 0.1. All other economic forecasts were unchanged. The median Dots were unchanged in 2017 and 2018, but the annual pace in 2019 did increase by 12.5 bps. The median long-run Fed Funds rate remained unchanged at 3%.
At the press conference, Chair Yellen remained optimistic in light of recent labor market, inflation and growth developments. This optimism in the underlying strength in the US economy was used to justify additional rate hikes. She also noted the substantial easing of financial conditions over the period. However, she emphasized the tightening cycle would continue to be gradual given the heightened level of uncertainty surrounding future growth paths in the U.S, specifically the potential impact of fiscal policy. The Chair was non-committal on changes to the balance sheet and mentioned that the Committee continues to have ongoing discussions. Chair Yellen reiterated that the Fed Funds rate would be the primary policy tool and balance sheet adjustments would be done in a gradual and least disruptive way as possible.