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As expected, the policymakers at FOMC increased federal funds rate by 25 basis points yesterday. There were only minor changes in FOMC projections compared to the December material. The forecast for long-term unemployment rate got increased by 0.1 percent to 4.8 percent. The target for federal funds rate for 2019 got increased by 0.1 percent to 3 percent. Let’s take a look at the FOMC statement for future clues. Current Federal funds rate target 75-100 basis points.
Let’s first assess the bias in monetary policy statement:
- Improvement in the labor market strengthened, while economic activity continues to expand at moderate pace (Neutral bias)
- Low unemployment rate and solid job gains (Neutral bias)
- Growth in household spending is strong, and business fixed investments have picked up somewhat. (Neutral bias)
- Measures of consumer and business sentiment improved. (Mild hawkish bias)
- Inflation picked up and now close to FOMC target but core inflation still below committee’s 2 percent long-run objective. Market-based measure picked up but survey based long term measure little changed. (Mild dovish bias)
- FOMC expects inflation to reach 2 percent objective over the medium term as economic activity improves and labor market strengthens. Near-term risks balanced.(Neutral 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)
The statement is almost same as last month’s, except for very few minor tweaks. Hence, what really important is to see the upcoming commentaries from Fed officials.
The statement has turned little dovish after this rate hike, which probably indicated that by hiking in March it is keeping its options open for three rate hikes in 2017 but subsequent hikes would depend on how economic conditions develop and also on the government’s fiscal stance.
The voting was just like our dashboard suggested. Only Minneapolis Fed President Neel Kashkari voted in favor of no hike in March.
