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FOMC Raises Fed Funds Rate by 25 Basis Points at Latest Meeting

FOMC Meeting

As expected, the FOMC lifted its federal funds target by 25 basis points to a range of 1.25 to 1.50 percent in a majority vote of 7 to 2. The committee expects the labor market to “remain strong” and the economy to continue to rise. Growth in household spending is once again described as being “moderate” and most still expect inflation to move higher before stabilizing at around 2 percent. Members of the FOMC continue to describe policy as accommodative and repeat that near-term risks are balanced. The two members who voted against the hike underscore the skepticism that high level of employment will eventually lead to a wage push inflation. There was no upward movement in the quarterly funds forecasts for next year with an outlook of three more 25 basis point moves expected until the rate is at 2.1 percent.  Six of the members see funds below this rate by the end of next year while four see it above the rate. The outlook for 2019 also calls for three similar rate hikes and now, call for two hikes in 2020, up from only one previously predicted.  GDP forecasts are up with 2018 now predicted to have a median of 2.5 percent up from the 2.1 percent previously predicted. The long run median holds at a modest 1.8 percent. Unemployment was forecasted to fall 3.9 percent next year from the prior call of a 4.1 percent decline.

Fed Chair Press Conference: Janet Yellen

The modest rate of wage growth is evidence that the labor market, despite its low 4.1 percent unemployment rate, is not overheating by any means.  Janet Yellen, Fed Chair, cited that given the softness in wages and the low path of inflation, that it could take a “longer period of a very strong labor market” before inflation finally gains traction. Though the 4.1 percent unemployment rate is ½ below the Fed’s long-term projections, she did not describe the economy as being at full employment, but rather only in the vicinity of full employment. She stated that unemployment will have to come down even more before full employment is reached. She noted repeatedly that one factor behind the lack of wage gains and lack of inflation is the workforce’s low rat of productivity growth. Expectations for tax cuts have helped the stock market post “significant” increases and in effect has translated to higher GDP and lower unemployment forecasts in the FOMC’s quarterly projections. She stated members of the committee are welcome the possibility of tax cuts which they see boosting both consumer and capital spending. A possible risk developing she cited was the flattening underway in the yield curve as short-term rates rise, in line with the Fed rate hikes, while the longer-term rates hold steady]. She said there was much discussion regarding the slope of the yield curve and that comparatively low long rates reflect a low term premium for future inflation risk. She warned the curve now may more easily invert as the Fed withdraws accommodation; an inverted curve is when short term rates exceed long term rate

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