US Fed likely to revise economic projections upwards and hike rates in June

The Federal Open Market Committee kept the federal funds target range unchanged at 0.25% to 0.50%, as expected. The Committee also kept its policy of reinvesting assets unchanged “until normalization of the level of federal funds rate is well under way”. According to the Committee, the economic activity has been growing at a moderate pace, in spite of the global economic and financial developments of recent month.

The Committee’s statement noted the strength of job gains, but it also acknowledged the risks on the downside posed by recent volatility. It added that global economic and financial developments continue to pose risks. During the meeting, Kansas City Fed Chair Esther George preferred to raise the target range for the federal funds rate by a quarter point at this meeting.

Along with the statement, the US Fed released the summary of economic projections (SEP). They were slightly softer than the December’s month’s projections. The Committee lowered the forecast for real GDP growth to 2.2% for 2016, as compared with the earlier forecast of 2.4%. Projections for 2017 real GDP growth were lowered to 2.1% from 2.2%. The median jobless rate forecast remained unchanged for 2016 at 4.7%, but was lowered for 2017 and 2018 to 4.6% and to 4.5%, respectively from 4.7%.

Meanwhile, the median forecast for core PCE inflation remain the same at 1.6% for 2016, whereas it was lowered for 2017 to 1.8% from 1.9%. Forecast for 2018 remained same at 2%. The median “dot” forecast of FOMC members for 2016-end moved down 50bps to 0.9% from 1.4%. This implies that the Fed members still project two interest rate hikes in the course of 2016. The median forecast for 2017 also declined 50bps to 1.9% from 2.4%, suggesting four hikes in 2017 and another four hikes projected in 2018.

Overall, the FOMC statement was dovish. The clear mention of risks on the downside from global economic and financial developments is strengthened by the moderate revisions to the economic outlook in SEP. The Fed’s projections did not recognize the recent upward turn in measured inflation. At the moment, there are upside risks to Fed’s inflation outlook. With the tightening of labor market continuing, inflation pressures are expected to build over 2017. These projections are likely to be revised upwards when the next SEP is released in June. Similarly, the US Fed is likely to hike rates in June.