FOMC Raises the Target Rate by 0.25%

Gary Pzegeo, CFA
March 22, 2018

This is the first FOMC meeting, post-meeting press release and press conference for new Chair Jerome Powell. The target rate should get most of the headlines, but the markets have been discounting an increase at this meeting for several months.
 

Followers of the Fed had a lot to take in yesterday afternoon. This is the first FOMC meeting, post-meeting press release and press conference for new Chair Jerome Powell. The target rate should get most of the headlines, but the markets have been discounting an increase at this meeting for several months. A growing debate within markets has been the likelihood of Powell’s Fed taking on a more hawkish approach to policy as measured by the easily quantified “dot plot” and more slippery area of language within the press release and press conference. It appears that we got a little of both. The Fed’s rate projections from the end of 2018 and beyond have been nudged higher to reflect stronger expected growth. At the same time, Powell softened the impact of the Fed’s projections at his press conference when he appeared to be less worried about inflation than markets have feared.

The structure of the Fed’s press release remains very similar to the one used by the Yellen Fed, which offered another indication that Powell will not be an agent of change in policy setting.

Following is a summary of the FOMC’s statement.

Growth

  • The Fed noted that the “economic outlook has strengthened in recent months," echoing Powell’s Congressional testimony and minutes from the January Fed meeting.
  • Job gains have been strong.  
  • Household and business fixed investment have moderated from strong fourth-quarter readings.

Inflation

  • Headline and core inflation continue to run below 2%.
  • Market implied expected rates of inflation have increased but remain low.

Policy

  • In a unanimous vote, the target range for federal funds was increased to 1.50% - 1.75%.
  • The median rate projection for the end of 2018 remains at 2.125%, implying 2 additional hikes this year. The average rate projection, however, is higher by 0.18% and there is an even split between voters projecting 2 and 3 additional hikes.
  • Board projections see core inflation above target by the end of 2019, requiring a more restrictive rate policy.
  • The Fed is projecting a median rate of 2.875% by the end of 2019 and 3.375% by the end of 2020.

The Fed has edged toward tighter policy as expected, and policy has been communicated in a manner consistent with the previous leadership.  Bonds seem to be benefitting at the margin from the less hawkish press conference responses of the new Chair.  Yields are lower by 0.02% - 0.03% across the yield curve.

Gary Pzegeo joined CIBC Atlantic Trust Private Wealth Management in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.