Fed raises rates quarter-point, forecasts further increases

In view of realized and expected labor market conditions and inflation, the Federal Open Markets Committee decided to set the target range for the federal funds rate at 1.5 to 1.75 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Commenting on the rate hike, State Street analysts noted that the upward revision to growth forecasts was not a surprise, but the Fed’s tone was more hawkish than anticipated.

Sophia Ferguson, senior portfolio manager for active fixed income and currency at State Street Global Advisors said in a statement:  “For his first meeting as Fed Chair, Jerome Powell sounded more hawkish than expected. Economic growth forecasts were revised as anticipated and while inflation has not shot up yet, employment on a firm footing and fiscal stimulus may lead the Fed to be more aggressive in 2019 on reducing the looser financial conditions.

“The Fed’s dot plot was not revised in 2018 but offers three in 2019. Such a scenario would push short rates to 3.25 percent by the end of 2019. This is much higher than today’s 10-year treasury yield and would potentially flatten the belly of the curve aggressively. Markets mildly reacted to this, but the potential beneficiaries could be US banks later down the road.”

Read the full FOMC statement


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