As expected, the Fed raised the target range of the Federal Funds rate by 25 basis points to 1.25 - 1.5%. Interestingly, this time around both Charles Evans and Neel Kashkari dissented against the decision although neither will be ‘voters’ on the 2018 committee.
Also of interest from the market’s perspective was the updated set of economic forecasts. The median projection for the Fed funds rate is unchanged looking for three 25 basis point hikes in 2018 and two in 2019. Importantly, and in spite of some upward revisions to the committee’s growth forecasts and reduced slack in the labour market, the committee’s median forecast for core PCE inflation was left unchanged at 1.9% for 2018 and 2% in 2019. According to Janet Yellen, ‘most’ participants had factored in some fiscal stimulus and changes in financial conditions: the median forecast for 4Q/4Q 2018 GDP was revised up by 0.4% to 2.5% and 2019 was edged higher to 2.1% from 2%. The committee also revised its forecast for the unemployment rate to 3.9% from 4.1% for 2018 and 2019.
Next year there will a number of changes to the Fed voters: with the annual rotation of 4 of the regional Fed voting board members excluding the New York Fed President which is a permanent voter, although William Dudley is due to retire mid-2018. Plus, 3 potential seats (including Janet Yellen’s when her term expires in February and assuming Marvin Goodfriend’s nomination is approved) still to be appointed on the Board of 7 Governors.
We see the projected rate rise forecasts as on the aggressive side and would expect the pace of hikes to ease in the second half of 2018 as the previous hikes and balance sheet hikes start to take effect. We expect the Fed will remain ahead of the curve and the yield curve will flatten and we will continue to favour positioning at the long end.