FOMC Monetary Policy June 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 175-200 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 solid rate. (Hawkish bias since it changes from neutral to solid)
• Job gains have been strong in recent months, and the unemployment rate declining. (Hawkish bias)
• Growth rates of household spending picked up and fixed investment have continued to grow strongly. (Hawkish bias)
• Inflation both including and excluding energy and food, consumer prices moved close to 2 percent. Indicators of longer-term inflation measure little changed, on balance. (Neutral bias)
• FOMC expects further on sustained expansion of the economy and strong labor markets. Hiked rates by 25 basis points and believe the monetary policy to be still accommodative. (Hawkish bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• Dropped Line: The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and the rate to remain below longer-run levels. (Hawkish bias)

The statement further elevates our bias assessment to very hawkish from quite hawkish based on previous statement.

The dollar’s weakness stemmed from the fact that the market was already pricing the hike and the focus is on ECB.  

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

• FOMC upgraded its growth forecast for 2018 from 2.5 percent to 2.8 percent. Kept unchanged its 2019 growth forecast of 2.4 percent. Maintained 2020 forecast of 2 percent. (Hawkish bias because Fed upgraded GDP forecast by 0.3 percent in the last two meetings)
   
• FOMC upgraded its unemployment rate forecast for 2018 from 3.8 percent to 3.6 percent. Upgraded 2019 forecast from 3.6 percent to 3.5 percent, and 2020 from 3.6 percent to 3.5 percent. (Hawkish bias)
   
• FOMC upgraded inflation forecast for 2018 from 1.9 percent to 2.1 percent, and for 2019 from 2 percent to 2.1 percent. Maintained forecast for 2018 and 2019 at 1.9 percent and 2 percent respectively. (Neutral bias)
   
• FOMC upgraded its core inflation forecast for 2018 from 1.9 percent to 2 percent. Kept it unchanged for 2019 and 2020. (Mild hawkish bias)
   
• FOMC upgraded its Federal funds rate forecast unchanged for 2018 from 2.1 percent to 2.4 percent. Upgraded its forecast for 2019 from 2.9 percent to 3.1 percent and kept it unchanged for 2020 at 3.4 percent. (Neutral bias)

So, the Fed is now forecasting a fourth rate hike for 2018. Both the projection materials and the statement is very hawkish. We expect the Fed to maintain its forecast for the year and we expect the Fed to upgrade its forecast further for 2019 and 2020.