In a Nutshell: “…the labor market has continued to strengthen and economic activity has been rising at a solid rate.”
Decision: Fed funds rate target range raised to 1.75% to 2.00%.
The Fed did what the Fed was expected to do, raise the federal funds rate by one-quarter percentage point. But that is not the whole story. The members indicated the FOMC would continue raising rates and we should expect to see two more increases this year, bringing the total number of moves to four and the increase to a total of one percentage point. And there will be a lot more over the next two years.
As for the economy, the Committee is really optimistic. Growth is solid, not moderate. Household spending is picking up as against moderating. And the unemployment rate is declining, rather than just low. Put that all together and you see that the Fed believes the economy is doing very well, which Chair Powell said in his press conference.
Given the positive view about the economy and the belief that inflation will run at, if not above, the Fed’s target of 2% for at least the next two years, the rate hike was logical. Looking at 2019 and 2020, the Committee expects the funds rate to top out somewhere in the 3.5% range. So there are a lot more moves to come.
Finally, the so-called “dot-plot”, which shows the individual forecasts, pointed to the unemployment rate starting to rise in 2020, even as inflation continues to accelerate. By 2020, the funds rate is projected to rise above what the Fed members consider to be the long-term or neutral rate. This time frame coincides with what many economists think could be the first likely start date for the next recession. Just something to keep in mind.
So, what are the takeaways from today’s Fed action, statement and the Chair’s press conference? This was a fairly hawkish report. Look for rates to rise consistently over the next two years, with the funds rate topping out at around 3.5%. Last, the Fed Chair will be holding press conferences after every meeting rather than every other meeting, so rate hikes at any meeting becomes more likely.
(The next FOMC meeting is July 31-August 1, 2018.)