Fed lifts rates: Drops accommodative term 

  • By Elizabeth Fry

 As widely expected, the US Fed raised rates for the eighth time in three years, bringing the targeted range of the Fed Funds rate to between 2 per cent and 2.25 per cent.

There were few surprises in the policy statement or the economic projections, with the Federal Open Market Committee signaling a continued gradual pace of rate hikes in the coming 18 months.

The policy statement was essentially unchanged, with the exception that the Committee removed references to monetary policy remaining “accommodative”.

Given that the minutes to prior meetings showed a discussion on just this point, this change is not surprising, says BNY Mellon market strategist Marvin Loh.

“The removal of the term “accommodative” does signal that the neutral rate is on the radar and the FOMC will need to justify restrictive monetary policy in the coming year, a somewhat dovish development in our view," he said.

Dots unchanged

Forward hiking projections implied by "dots" remain unchanged for 2018, 2019 or 2020.

These averages show one last rate hike this year, an additional three hikes in 2019 and one final hike in 2020.

But, Loh added, the composition of those dots did, however, signal more confidence from the policymakers on their view of the economy.

“For instance, as far as 2018 is concerned, there are now 12 votes for at least one last 2018 hike versus just eight such votes in June,” he argued.

Loh tends to discount 2020 projections given how much can happen in the coming two years, but he noted that there is a clear line in the sand being drawn.

“Taking outliers out of the discussion, we notice that there are now four votes that believe the hiking cycle should end in 2019 (with a 3.125 per cent rate), while there are now six votes for an additional two hikes (to 3.625 per cent) into 2020. The overall median was therefore unchanged at 3.375 per cent.

“The final dot increased slightly to 3.0 per cent from 2.875 per cent, which is essentially unchanged and indicates to us that the overall view on the neutral rate has not changed significantly since the summer, despite recent chatter to the contrary.

The committee submitted its first projections for 2021, which set the funds rate at 3.375 per cent, unchanged from the 2020 median.

Stronger economy

Loh views most of the changes in the economic projections as small tweaks, reflecting the stronger than expected performance of the US economy this year. For instance, this year’s GDP expectations were raised to 3.1 per cent from 2.8 per cent, while 2019 ticked higher by 10 basis points to 2.5 per cent.

Growth is expected to slow towards 1.8 pe cent in 2021.

In essence, the unemployment rate was little changed, the inflation outlook remained stable, with headline and core near the 2 per cent level through the entire forecast period.

According to Loh, the market's reactions have been somewhat muted although that said Treasuries had been short going into the FOMC meeting and are slightly rallying, as yields are up to 3 basis points lower, while the curve is slightly flatter.