Fed View: December hike a done deal, but little change in projections further out – The FOMC raised its target range for the federal funds rate by 25bp to 2.00-2.25%, as was widely expected. The Committee’s median rate hike projections were also unchanged (2018: 1 hike; 2019: 3 hikes, 2020: 1 hike), as we had anticipated, although the subsequent drop in yields and the dollar suggested the market had expected some shift upward in the medians. While there was a sizeable increase in the number of members expecting one further 2018 hike (11 members, up from 7 previously), such a hike was already 80-90% priced by financial markets, and so the disappointment at the lack of a significant change in the 2019 projections seems to have more than outweighed this. The projections for 2021 were released for the first time, with the median fed funds rate the same as 2020 at 3.4% – i.e. the Fed expects policy to remain on hold in 2021. Notable, however, was that two members are looking for a rate cut in 2021, likely reflecting the weaker growth projections for that period.
The FOMC statement was further shortened, with the most important change being the removal of the sentence ‘The stance of monetary policy remains accommodative (…)’. Chair Powell was repeatedly questioned on this in the press conference, and was keen to stress that the removal had no bearing on the Fed’s view on the path of monetary policy, and pointed to the fact that rates still remain below even the lowest neutral rate estimates from FOMC members (indeed, the median neutral rate estimate was raised marginally, to 3.0% from 2.9%). Similar to his Jackson Hole speech, he also continued to cast doubt on the reliability of neutral rate estimates, and did not want to suggest the Fed had a clear understanding of where exactly ‘accommodative’ is.
All told, the minimal changes to the dot plot projections and a balanced Powell press conference support our view that the Fed will hike a further three times by next June, taking the target range for the fed funds rate to 2.75-3.00%.