FOMC Rate Hike Takes Backseat to Less Accommodative Outlook

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It was no secret that the Federal Reserve’s Open Market Committee (FOMC) was set to hike interest rates on Wednesday, September 26. In fact, the CME FedWatch Tool, which uses Fed Fund futures in its calculations, was already predicting a 95% chance that the FOMC would raise the Fed Funds rate by 25 basis points.

In Wednesday’s announcement, the Fed Funds rate was raised by 25 basis points to a target range of 2.00% to 2.25% from the prior 1.75% to 2.00% target range. What was going to be interesting was to see how “Accommodative” the Fed still thinks it is and to see if there were any changes to the natural level of normalized interest rates. The end result is that the FOMC has not used the term “accommodative” in the new September statement.

Many of the coming financial media and mainstream media comments are likely to infer that less accommodative language and statements means that Jerome Powell and his team are likely to be more hawkish. The reality is that the Fed’s actual forecasting for future Fed Funds rates is just not really all that hawkish and it should be said that this would appear that the rate hike cycle, at least as of this meeting, appears to be closer to the end than the beginning.

It turns out that the FOMC members see chances quite high for one more rate hike in 2018, which is likely implying December (see below).  The FOMC also voted to raises the Discount Rate by 25 basis points up to 2.75%. And the decision made on the rate hike was unanimous.

As this was the end of a quarter, the FOMC also included median projections from its members. These target unemployment, GDP growth, inflation expectations and the expected level of the Fed Funds rate in the quarters and years ahead.

In the longer-run outlook, the Fed officials’ median forecast sees the unemployment rate falling to 3.5% in the 2019 to 2020 period — and rising back up to 3.7% in 2021. The longer run unemployment rate was unchanged from the June projection of 4.5%.

The Fed’s new median longer-term GDP growth forecast is still the same 1.8% that had been shown in June. Meanwhile, the Fed officials’ median GDP growth forecast was raised to 3.1% in 2018 and then to 2.5% in 2019.

The Fed’s median 2019 PCE inflation forecast was lowered to 2% from the 2.1% forecast in June.

The current median longer-run view for the Fed Funds rate is 3.0%, although that may go higher in the coming years. The Fed’s median Fed Funds rate is 3.4% at the end of 2021 and 3.4% at the end of 2020 — and a median Fed Funds rate of 2.4% at the end of 2018 followed by a median Fed Funds rate of 3.1% at the end of 2019.

While much of the targeted language is rather official, there are some obvious takeaways here. Gradual increases should be expected with sustained expansion. Also worth noting, despite tariffs and trade war fears, the Fed’s longer-term views of inflation are little changed. And the Fed sees the risks to the economic outlook appear to be roughly balanced at the present time. To sum this up, the FOMC statement said:

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

The CME FedWatch Tool predicted almost a 94% chance of no interest rate hike at the November 8, 2018 FOMC meeting date. Also less than a half-hour ahead of the formal decision, the CME FedWatch Tool had a 74% chance that there would be another interest rate hike to a range of 2.25% to 2.50% at the December 19, 2018 FOMC meeting.

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