The US central bank has maintained its course of interest rate rises, extending the interest rate corridor as expected by 25 basis points to 2.0% to 2.25%. The FOMC statement has been adjusted and the level of key interest rates is no longer described as accommodative. However, this had been broadly expected and therefore comes as no surprise to market participants. Otherwise, the adjustments to the FOMC statement – which was agreed unanimously – were as usual only marginal. Projections indicate another rate hike before the end of this year. A clear majority of FOMC members do now at least support a fourth rate move in 2018, which could therefore take place in December.
The US central bank has thus essentially confirmed its cycle of interest rate rises which is still expected to end at 3.40%. We share the Fed’s views on monetary policy and expect the central bank to raise key interest rates to a level of 3.50% in the current tightening process.
FOMC Statement: Monetary policy no longer accommodative
The press statement published immediately after the interest rate decision shows only marginal changes. The solid economic situation is highlighted again. Both economic growth and job growth are strong and inflation remains close to the central bank’s target. The only significant change relates to the general assessment of the direction of monetary policy which is no longer described as accommodative. The central bankers thus confirm that the fed funds rate is slowly approaching a neutral level. The Fed statement indicates a future strategy of further gradual rate hikes. No changes have been made to the passage stating that further gradual increases in the interest rate corridor are compatible with the continuing expansion of economic activity, solid conditions in the labour market, and inflation close to the symmetrical 2 per cent target.
Projections slightly more optimistic – cycle of rate rises to end at 3.40%
In terms of projections, the central bankers still expect interest rates to be raised four times this year. While the June projections showed that only eight central bankers expected a fourth rate hike in 2018, twelve FOMC members now anticipate a further tightening of monetary policy. Members of the FOMC still expect three interest rate hikes next year. The minutes of the meeting show an expected level of 3.40% towards the end of 2020. The new forecasts also included estimates for 2021, when key rates are set to remain unchanged at 3.40%.
Fed boss Powell confirms continuing course of moderate rate hikes at press conference
Chairman of the central bank Jerome Powell explained at the press conference that the Fed will continue to raise key rates gradually in future. There are no plans to accelerate the cycle of rate rises, which many market participants had feared would happen as a result of increased wage pressure. Powell stated that the risks to the economic outlook and inflation are in balance. An interesting question was raised about the end of the cycle of rate rises. Powell was asked how the Fed can know to what level the fed funds rate will have to be increased given that interest rate rises have a delayed effect. Powell admitted that the Fed follows a “trial and error” approach. Monetary policy is being tightened but the central bank is closely monitoring the economic impact. The interest rate hikes carried out so far have not had a negative impact on the economy.