FOMC Monetary Policy September 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 200-225 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 strong rate. (Hawkish bias since it changes from solid to strong)
• Job gains have been strong in recent months, and the unemployment rate declining. (Hawkish bias)
• Household spending and fixed investment have continued to grow strongly. (Hawkish bias)
• Inflation both including and excluding energy and food, consumer prices is close to 2 percent. Indicators of longer-term inflation measures little changed, on balance. (Neutral bias)
• FOMC expects further sustained expansion of the economy and strong labor markets. Hiked rates by 25 basis points and removed the ‘accommodative’ word while describing the monetary policy. (Hawkish bias)
• Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
• The decision was unanimous. (Hawkish bias)

The statement sustains our bias assessment of very hawkish.

The dollar’s weakness stemmed from the fact that the market was already pricing the hike and the focus is on other factors such as trade war and policies of other central banks.  

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

• FOMC upgraded its growth forecast for 2018 from 2.8 percent to 3.1 percent. Increased its 2019 growth forecast from 2.4 percent to 2.5 percent. Maintained 2020 forecast of 2 percent. (Hawkish bias because Fed upgraded GDP forecast by 0.6 percent in the last three meetings)
   
• FOMC downgraded its unemployment rate forecast for 2018 from 3.6 percent to 3.7 percent. Kept the rate unchanged for 2019 and 2020 at 3.5 percent. (Neutral bias)
   
• FOMC kept inflation forecast for 2018 unchanged at 2.1 percent and downgraded for 2019 from 2.1 percent to 2 percent. Maintained forecast for 2020 at 2.1 percent. (Neutral bias)
   
• FOMC kept its core inflation forecast for 2018 unchanged 2 percent. Kept it unchanged for 2019 and 2020 at 2.1 percent. (Neutral bias)
   
• FOMC kept its Federal funds' rate forecast unchanged for 2018 at 2.4 percent, 2019 at 3.1 percent, and 2020 at 3.4 percent. (Neutral bias)

Except for growth, the Fed’s forecast is broadly unchanged. 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.