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Fast Comment USFed raises rates as expected and signals two more rate increases next year

  1. Fed raises rates as expected and signals two more rate increases next year
  2. Fed turns off the autopilot and becomes more data dependent as the funds rate approaches neutral levels
  3. We expect the Fed to push ahead with two more rate increases next year
Fed raises rates as expected and signals two more rate increases next year
As widely expected, and in line with market pricing, the Federal Reserve increased the target range for the fed funds rate by 25bp to 2.25-2.50 percent at the FOMC meeting that concluded today. Also as expected, the Fed raised the interest rate on excess reserves (IOER) by only 20bp. The smaller increase of the IOER is merely a minor technical adjustment to ensure that the fed funds rate stays closer to the middle of the target range. As today’s decision to increase interest rates for the fourth time this year was anticipated, attention inevitably shifted to the outlook for 2019. The median projection for the policy rate signals two 25bp increases in 2019 (down from three increases in the September projection). Furthermore, the median projection indicates one more increase in 2020 (the same as in the September projection), signalling a peak in the interest rate at 3.1 percent compared with 3.4 percent in the September projection. The FOMC also lowered its forecasts for the long-run neutral interest rate from 3.0 percent to 2.75 percent, indicating that the Fed is getting closer to a neutral policy rate. The USD strengthened somewhat on the outcome. Currently, the market is pricing in a strong case of no increase at all in 2019.
Fed turns off the autopilot and becomes more data dependent as the funds rate approaches neutral levels
The changes to the press statement and economic projections were minor (see table below), as incoming data on economic activity have provided little reason for the Fed to change its outlook from “strong”. The most important changes to the economic projections were slightly lower inflation and GDP growth in 2018-19, and these formed part of the justification for fewer rate increases next year. As the fed funds rate is now approaching its longer-run neutral rate, incoming data will become more important as a guide to future policy action, in our view. The statement also shows that the FOMC is monitoring the financial development (“The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook”).
We expect the Fed to push ahead with two more rate increases next year
On balance, we still expect the Fed to raise interest rates twice in the first half of next year. By that stage, we think weaker growth will prompt the Fed to move to the sidelines, with the next move likely to be rate cuts in 2020. However, among other things, the weakness of core inflation in recent months means there is an increasing possibility that the Fed will cease its rate increases in the first half of 2019.

 


Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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