The Federal Open Market Committee (FOMC) raised the federal funds target rate by 25 basis points today (100 basis points equals 1%). The target range increased to 0.75 to 1.00 percent. The Committee reiterated that it expects economic conditions to evolve in a manner that will warrant gradual increases in the federal funds rate.
- Although the unemployment rate is little changed, the labor market remains solid.
- Household spending and economic activity continue to expand at a moderate pace.
- Although headline inflation has increased recently, inflation numbers that exclude energy and food prices remain little changed and are below the Committee’s two percent longer-run objective.
- The stance of monetary policy remains accommodative, supporting strengthening employment and stable inflation (targeting a two-percent inflation rate).
- Near-term risks to the economic outlook appear roughly balanced.
- The FOMC continues to expect that economic conditions will expand at a moderate pace and that labor market conditions will strengthen somewhat further. Inflation is expected to stabilize at around two percent over the medium term. As a result, we should expect gradual adjustments to monetary policy in the future.
- The FOMC’s expectations for future rate hikes (as indicated by their “dot plots”) suggest two more rate hikes this year, and roughly three hikes in 2018 and 2019. These projections slightly increased from their last release of projections.
- The market’s future expectations have recently shifted to slightly favor three interest-rate hikes this year (versus two).
- The Federal Reserve (Fed) continued to describe the path of future rate hikes as “gradual” (although they removed the word “only”) and dependent upon economic data.
- The vote had one dissenter as Neel Kashkari preferred to maintain the existing interest-rate target.
- As noted, the future stance of monetary policy remains data-dependent.
- The market reaction to the statement was modest. Domestic bond yields moved slightly lower, while equity markets generally moved slightly higher. The U.S. dollar was somewhat lower, and commodities were unchanged following the statement release.
- The FOMC decision today was predictable and priced into fixed-income assets.