Against the backdrop of strong growth and given the risk of capacity constraints and inflation, the Federal Reserve followed its carefully laid out plan and raised rates to the surprise of no one. The federal funds target range moves to 2.00 to 2.25 percent with the midpoint target at 2.125 percent. Based on updated FOMC forecasts, one more 25-basis-point hike is still scheduled for the remainder of the year, undoubtedly with expectations to be exclusively centered on the December meeting, with three such hikes still scheduled for next year.
The sweep of "strong" economic assessments are unchanged: for economic activity, job gains, household spending, and business investment. Risks are still seen as balanced though there is one notable change in the text and that's the removal of the line that monetary policy is accommodative. Though this change could suggest that policy makers see the funds target in a neutral, not stimulative, zone, Jerome Powell clarified in his subsequent press conference that he thinks policy is still accommodative and that the removal of the line reflects a lack of precise understanding, tied largely to uncertainties over future productivity growth, of where a particular funds level stops stimulating the economy. He further noted that the line has "run its useful life".
Back to the statement, there is no change to the funds target for 2020, staying at a median 3.4 percent to indicate only one 25-basis-point hike is expected for that year. For 2021, no hikes are expected.
Median forecasts are unchanged for core inflation, at 2.0 percent this year and 2.1 percent in 2019 and 2010. The 2018 median for overall PCE inflation is unchanged at 2.1 percent with 2019 now at 2.0 percent vs 2.1 percent in the June forecasts. The 2020 overall PCE median remains at 2.1 percent. Inflation is once again described as running near the Fed's 2 percent symmetrical target.
GDP forecasts are, however, upgraded with 2018 now at 3.1 percent vs 2.8 percent in the last set of FOMC forecasts posted in June. GDP for 2019, at a median 2.5 percent, is seen 1 tenth higher than in June. The unemployment rate is moved 1 tenth higher this year to 3.7 percent with both 2019 and 2020 unchanged at 3.5 percent.
There is no mention of trade policy or fiscal policy in the statement, topics that would be addressed at Powell's press conference. The vote was once again unanimous, at 9 to 0 and including the newest governor Richard Clarida.
A rate hike is the universal expectation among Econoday's panel for September's FOMC meeting, a hike that would be tied directly to the strength of the jobs market and risk that lack of available labor will begin to push inflation higher. The FOMC is expected to raise its federal funds target range by 25 basis points to a range between 2.00 and 2.25 percent with an implied target of 2.125 percent. Also released will be quarterly FOMC forecasts, which in the last set had penciled in an additional rate hike before year end. A press conference with Jerome Powell is also scheduled.
The FOMC meeting announcement is a policy statement issued at the conclusion of each meeting of the Federal Open Market Committee. It offers updates on economic conditions with special focus on the health of the labor market and the latest on inflation. It also updates the status of the federal funds target which is the FOMC's official policy interest rate. This rate is expressed within a range, such as 1.75 to 2.00 percent. The center of this range is the implied target. The higher this target, the more restrictive monetary policy becomes, the lower this target, the more accommodative policy becomes. Other policy tools are also discussed in the meeting announcement including updates on direct purchases of Treasuries and mortgage-backed securities. Debate is not offered in the statement, just the consensus view is expressed, though the statement does list the total committee vote and how each member voted.
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