The Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), raised rates by 0.25% (25 basis points) at the conclusion of its two-day meeting, as was widely expected. This is the fifth rate hike in this cycle, and brings the fed funds target range to 1.25–1.50%.
This rate hike also saw the highest level of internal opposition of the cycle. Of the nine voting members of the FOMC, two dissented: Minneapolis Fed President Neel Kashkari, and Chicago Fed President Charles Evans. Kaskhari’s vote was no surprise—he has dissented every time the Fed has hiked rates this year. Evans is also a well-known monetary policy Dove, however, he voted in favor of the previous three rate hikes in 2017. It is important to note that neither will be voting members in 2018, making their opinions less impactful moving forward.
In addition to a statement, the Fed released an updated set of dot plots, in which each FOMC member (both voting and non-voting) offers their view on the future path of interest rates; as well as its updated economic projections. It is interesting to point out that the Fed made slight upgrades to growth and labor market projections (likely due in part to the potential impact of tax reform) over the next two years, but didn’t see the need to increase inflation or rate hike expectations over that time period, showing that the Fed continues to be unsure about how labor market and inflation dynamics will play out.
The Fed’s statement was little changed, other than a slight downgrade to language about labor markets; shifting from its prior expectation that they would “strengthen somewhat further” to instead saying they would “remain strong.” Household spending was seen as expanding at a moderate rate, while business fixed investment was described as picking up in recent quarters (click here for a side-by-side comparison of today’s statement versus the Fed’s statement released at the last FOMC meeting on November 1, 2017). The Fed didn’t make any material changes to its inflation language, but it reiterated that the “near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”
Stocks moved higher following the announcement, while both 2- and 10-year Treasury yields moved slightly lower, resulting in little change to yield curve steepness. We will continue to monitor sentiment as initial reactions often change as market participants have more time to digest the Fed’s guidance and any new information from the press conference, which was being held as this blog was prepared.