FOMC Monetary Policy March 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 150-175 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 moderate rate. (Neutral bias)
• Job gains have been strong in recent months, and the unemployment rate has stayed low. (Neutral bias)
• Growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. (Mild dovish bias)
• Inflation both including and excluding energy and food, consumer prices running below 2 percent. The market-based measure of inflation compensation low. Survey-based inflation measure little changed on balance. (Neutral bias)
• FOMC expects gradual policy adjustments and expects further strengthening in the labor market and moderate expansion in the economy. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. (Mild hawkish bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• 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. (Neutral bias)

Though the Federal Reserve has maintained its three hikes forecast for 2018, the monetary policy has turned much more neutral compared to its December statement, which was quite hawkish.

The dollar’s weakness stemmed from the fact that the market was already pricing three rate hikes for 2018 and the Fed didn’t signal a fourth hike.

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 2.7 percent. Upgraded its 2019 growth forecast from 2.1 percent to 2.4 percent. Maintained 2020 forecast at 2 percent. (Hawkish bias)
   
• FOMC upgraded its unemployment rate forecast for 2018 from 3.9 percent to 3.8 percent. Upgraded 2019 forecast from 3.9 percent to 3.6 percent, and 2020 from 4 percent to 3.6 percent. (Hawkish bias)
   
• FOMC upgraded inflation forecast for 2020 from 2 percent to 2.1 percent. Maintained forecast for 2018 and 2019 at 1.9 percent and 2 percent respectively. (Neutral bias)
   
• FOMC kept its core inflation forecast unchanged for 2018 at 1.9 percent. Upgraded forecast for 2018 and 2019 from 2 percent to 2.1 percent. (Mild hawkish bias)
   
• FOMC upgraded its Federal Funds rate forecast unchanged for 2018 at 2.1 percent. Upgraded its forecast for 2019 from 2.7 percent to 2.9 percent and forecast for 2020 from 3.1 percent to 3.4 percent. (Neutral bias)

It is quite clear, while the statement was much more neutral compared to December, the projection materials were much more hawkish. On balance, the policy was hawkishly tilted and there is no reason to doubt that the FOMC will follow through its interest rate forecast.