The statement emphasises inflation, saying it should rebound in the short run and then stabilise around 2%. The FOMC also mentions it will follow further developments (to avoid overheating, as mentioned by Fed Chair Jerome Powell in his testimony).
Monetary policy remains accommodative and risks are balanced. The statement suggests the pace of rate hikes will remain gradual.
The statement was well balanced, and not particularly hawkish despite the decision to raise rates.
- GDP projections have been revised up: 2.7% from 2.5% for 2018; 2.4% from 2.1% for 2019; 2% for 2020, and unchanged at 1.8% for the long run.
- Inflation projections: no change for 2018 (1.9% y/y); 2019 PCE at 2% and core PCE at 2.1% (+0.1pp); 2020 PCE and core PCE up by 0.1pp to 2.1%; long-term at 2%.
- Unemployment rate projections have been revised down, from 3.9% to 3.8% for 2018, from 3.9% to 3.6% for 2019, and from 4% to 3.6% for 2020.
- Fed dots for 2019 and 2020 have been revised up: no change for 2018 (3 rate hikes, final rate at 2.125%); 2019 final median rate at 2.875%, revised from 2.688%; 2020 median rate revised up from 3.06% to 3.375%; long-run rate revised from 2.75% to 2.875%.
The surprise from the dots is the unchanged projection for 2018, while economic forecasts have been increased; pressure and expectations in favour of 4 rate hikes this year may remain, given the positive growth and labour data; if inflation/wage pressure rises further during the year, upward revisions to the 2018 dots will be highly likely. Also, the number of FOMC governors in favour of 4 rate hikes in 2018 has significantly increased since the last meeting.
The Q&A session did not reveal anything unexpected. Some of the statements made were that upward revisions are due to budgetary policy, that trade policy is a risk but has not been integrated into decisions, that stress tests on banks are still justified, that the rise in 10y TY is not a concern as growth is also stronger, and that the flat or slightly inverted yield curve is not a sign of recession but that this is an issue in terms of monetary transmission.
This was a well-balanced communication, not too hawkish and still cautiously dovish, with a sense of continuity after Yellen’s period in office.
A rate-tightening cycle is now under way, but it remains gradual and aims for normalisation in the medium term.