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FOMC Raises Rates

FOMC Meeting Announcement

As expected, the FOMC did raise its rate target up 25 basis points to a level ranging between 1.00 to 1.25 percent. The Fed said the labor market has continued to strengthen and business spending has continued to expand. It also said that house hold spending has picked up in recent months, referring to a 0.4 percent rise in April consumer spending; there was no mention of the 0.3 percent decline in retail sales. The official FOMC outlook for inflation was described as “has declined recently” and it will be “monitoring closely.”  The median for this year’s funds target remains at 1.4 percent, meaning only one more rate hike will take place this year, and next year’s median holding at three rate hikes. PCE inflat5ion has been downgraded to 1.6 percent this year, 3 tenths below the March forecast but remains unchanged for the next two years at 2.0 percent.  The core PCE is seen at 1.7 percent this year, down 2 tenths from March, then is predicted to hold at 2.0 percent in both 2018 and 2019. GDP forecasts increased 1 tenth to a median of 2.2 percent this year with no changes to 2018-2019, at 2.1 and 1.9 respectively.  The unemployment rate forecasts decreased by 2 tenths this year to 4.3 percent and is down 3 tenths for the next two years to a level of 4.2 percent; another indication of expected growing labor strength. The FOMC expects to begin unwinding its $4.5 trillion balance sheet this year, provided that the economy continues to expand as expected.

Fed Chair Press Conference

Janet Yellen in her in her quarterly press conference cautioned that the downgrade for inflation between the May FOMC meeting and the June FOMC meeting, may reflect noise in the economic data. On the upside for inflation, Yellen pointed out the decline in the unemployment rate, saying that the majority remains at work and that overall inflation will respond to changes in unemployment but not at a very quick pace. Yellen state a wide variety of data is pointing to labor market tightness, including household and business assessments of the jobs market; she also stated she believes wages are likely to move up. She said “removing a bit of accommodation” right now is prudent and will lower the risk that the FOMC, who suddenly is faced with an upturn in inflation, may need to raise the funds rate quickly in the future and thereby risk a recession.  As mentioned in the FOMC meeting announcement, it plans on unwinding the Federal Reserve’s $4.5 trillion balance sheet though no time frames were given. If the economy improves as the FOMC expects it to, Yellen said the unwinding could begin “relatively soon” and last perhaps a few years. She did not give a dollar level amount that the balance sheet would be brought down to, saying that will depend on bank demands for reserves.

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