As expected last night the FOMC raised the federal funds rate 25 bps to 2.00-2.25%, with the forecasts for the dot medians unchanged at 2.375%, 3.125%, and 3.375% for 2018, 2019, and 2020 respectively and the 2021 median now coming in the same as 2020 at 3.375%. The Fed also revised up from their June forecast of GDP growth for both 2018 and 2019, however generally retained their view that the growth rate will drop back to 2% in 2020 and 1.8% in 2021. In the statement after the announcement, the Fed removed a phrase that noted that policy remains ‘accommodative’, a change that was hinted at strongly in the August minutes. There was no mention of an update to the Fed’s current balance sheet policy.
In the press conference, Jerome Powell, the Fed Chair, strongly downplayed the importance of the removal of the phrase regarding policy being ‘accommodative’ from the FOMC statement, saying on several occasions that the change was not intended to give a signal about future policy while rates are ‘obviously still accommodative’. He also noted that the USD has only partly recovered its 2017 decline, giving little indication that the Fed is overly concerned with the recent strengthening in the USD. Powell once again highlighted tariffs and ongoing trade disputes as a risk, however, stuck to his preference for a 'wait-and-see approach', which he also expressed during the Jackson Hole conference. He also noted that we are ‘living in a world of strongly anchored inflation expectations’ when asked about the inflation outlook in an environment of low unemployment. Powell, when asked directly if the Fed would be willing to stop hiking due to emerging market stresses, said the Fed certainly considers EM developments and understands that Fed policy impacts on the rest of the world, but reminded that the Fed’s mandate is a domestic mandate.
As always Donald Trump gave his view on the Fed move in a press conference after the event. ‘Unfortunately they just raised interest rates a little bit because we are doing so well. I'm not happy about that’ Trump said, adding ‘I'm worried about the fact that they seem to like raising interest rates; we can do other things with the money’. This is not the first time Trump has criticized Powell on his rates policy, having already said that the Fed chair was not the ‘cheap money’ banker he hoped for.