FOMC Monetary Policy December 2018: Assessing future bias from statement and projection materials

As expected, the policymakers at FOMC hiked interest rates by 25 basis points at yesterday’s meeting. Current Federal funds rate target 225-250 basis points.

Let’s first assess the bias in monetary policy statement –

• Improvement in the labor market continues to strengthen, economic activity rising at a strong rate. (Mild hawkish bias; positive statement but same as before)
• Job gains have been strong in recent months, and the unemployment rate declining. (Mild hawkish bias; positive statement but same as before)
• Household spending has continued to grow strongly. (Hawkish bias)
• Business fixed investment has moderated from its rapid pace earlier in the year. (Mild dovish bias)
• Inflation both including and excluding energy and food, consumer prices is close to 2 percent. Indicators of longer-term inflation measures little changed, on balance. (Neutral bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The decision was unanimous. (Hawkish bias)

The statement slightly less hawkish than the last statement but still pretty hawkish.

The dollar’s weakness stemming from the fact that the market was already pricing the hike and the focus is on other factors such as trade war and policies of other central banks.  

Now, let’s take a look at the changes made in the projection materials.

• FOMC downgraded its growth forecast for 2018 from 3.1 percent to 3 percent. Reduced its 2019 growth forecast from 2.5 percent to 2.3 percent. Maintained 2020 forecast of 2 percent. (Dovish bias because Fed downgraded GDP forecast by 0.2 percent for next year)
   
• FOMC downgraded its unemployment rate forecast for 2020 from 3.5 percent to 3.5 percent. Kept the rate unchanged for 2019 and 2018 at 3.5 percent and 3.7 percent. (Mild dovish bias)
   
• FOMC downgraded inflation forecast for 2018 unchanged from 2.1 percent to 1.9 percent and downgraded for 2019 from 2 percent to 1.9 percent. Maintained forecast for 2020 at 2.1 percent. (Dovish bias)
   
• FOMC downgraded its core inflation forecast for 2018 from 2 percent to 1.9 percent. Downgraded 2019 core inflation forecast for 2019 from 2.1 percent to 2 percent. Kept it unchanged for 2020 at 2 percent. (Mild dovish bias)
   
• FOMC followed through its forecast for 2018 with rates at 2.4 percent but downgraded 2019 forecast to 3.1 at 3.4 percent, and 2020 at 3.1 percent. (Mild dovish bias)

On balance, the Fed statement was still quite hawkish, while projections were significantly dovish compared to the September forecast. On balance, the Fed is still very hawkish, and very likely to follow through its 2019 forecast of two rate hikes. A hike in March looks very unlikely. Likely to hike first in June, should the economy maintain its pace.