Following the Fed’s 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 (FOMC) increased the Fed Funds rate to a range of 1.50% – 1.75%. At this meeting, Fed members also updated their Summary of Economic Projections and Chairman Powell hosted his first quarterly press conference.
The March statement served as a mark-to-market of current conditions and an optimistic tone toward the medium term outlook. The Committee continues to acknowledge that its preferred measure of inflation is running below its target, but acknowledged supportive base effects going forward. The FOMC continues to characterize the path of future rate hikes as gradual. The Fed statement did not reference the balance sheet but the process will continue in the background. In April, the maximum run-off per month will rise from $20bln to $30bln ($18bln Treasury/$12bln MBS).
We can break the statement into three parts:
There were no dissenters.
Summary of Economic Projections
Investors had priced in nearly 100% probability of a rate hike at this meeting, so the SEPs and the “Dot Plot” took on greater importance. Within the projections, the growth forecasts were upgraded for 2018 and 2019. The Chair mentioned the upgrade to growth reflected changes to fiscal policy (as longer run growth expectations remained unchanged). The inflation forecasts were unchanged in 2018 but increased to above the Fed’s target in 2019 and 2020, suggesting the FOMC members were comfortable with a small overshoot. The unemployment rate estimates were cut rather dramatically for the next few years while the long-run unemployment rate was also shifted downward, signaling that further declines in the unemployment rate may lead to less wage growth than otherwise expected.
The median dots were unchanged in 2018 reflecting two more rate hikes this year, but did shift upward in 2019 and 2020 by one hike and 1.5 hikes, respectively. The Committee also shifted the long-run dot upward by half a hike, reflecting fewer headwinds to the supply side of the economy.
Chair’s Press Conference
At Chairman Powell’s first press conference, he sounded optimistic in light of recent labor market and growth developments with an open mind toward the long-run impact of fiscal policies on US capacity. The Chair communicated his belief that inflation and wage growth are only moving up slowly (flat Phillips curve). He communicated that the Fed’s existing framework of gradual rate hikes still remained appropriate.