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Fast Comment USFed on course for rate hike in September

  1. Fed leaves rates on hold, as expected
  2. Minor tweaks to press statement; Fed on course for rate hike in September
  3. We expect that the Fed will continue to raise rates once a quarter
Fed leaves rates on hold, as expected
As widely expected, the Fed maintained the target range for the federal funds rate at 1.75-2.00 percent at the FOMC meeting that concluded today. The vote was unanimous. The meeting was not followed by a press conference or update on the economic projection, so the communication is limited to the press release, containing little new information. The initial market reaction was fairly modest.
Minor tweaks to press statement; Fed on course for rate hike in September
The changes to the press statement were minor. Incoming data on economic activity has provided little reason for the Fed to change its outlook. Some modest changes to the descriptive language acknowledge the recent data (growth is strong rather than solid, unemployment has stayed low rather than declined, household spending has grown strongly rather than picked up), but there are no substantive changes to the rest of the text. As expected, the statement did not comment on the sensitive topic of US trade policy. Uncertainty over trade policy appears to be worrying some officials, with the minutes of the June FOMC meeting revealing concerns that it was already weighing on firms’ investment plans. Those concerns are likely to have intensified in recent weeks. However, there has been little sign of any adverse impact on the domestic economy so far and we think it would take a much more serious escalation of trade restrictions for the Fed to reconsider its plans for further interest rate hikes. All in all, everything points to the next hike taking place in September, which is almost fully priced in by markets.
We expect that the Fed will continue to raise rates once a quarter
The labour market is tight and there are signs that wage and inflation pressures are starting to build. That would keep the pressure on the Fed to continue raising interest rates once a quarter. We expect that the Fed will hike the fed funds rate two more times in 2018 (September and December) and probably twice in 2019 (March and June). By that stage, we think weaker growth will prompt the Fed to move to the sidelines, with the next step likely to be rate cuts in 2020.

Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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