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FOMC: Three hikes done, one more to go

Fed forecasts one more rate hike in 2018. Removes dovish language from forward guidance

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  • Federal Reserve hikes rates by 25bps to bring short-term interest rates to 2.0% – 2.25% as widely expected
  • One more rate hike projected by the end of this year
  • Three rate hikes penciled in for 2019
  • Fed removes accommodative language from its forward guidance indicating a faster pace of rate hikes
  • GDP revisions forecast higher growth according to Fed officials

The Federal Reserve bank, the central bank of the United States held its monetary policy meeting last week on Wednesday. At the conclusion of the two-day monetary policy meeting, the central bank hiked interest rates by 25bps as widely expected.

The U.S. dollar was seen relatively muted as the interest rate hike came and the central bank removed the accommodative language from its forward guidance. This suggests that interest rates will support faster growth.

The decision to hike interest rates was a unanimous decision.

One more rate hike to come

The Federal Reserve showed in its dot plot which gives the forecasts of interest rates that investors could expect one more rate hike this year. The next FOMC meeting is scheduled for December. Speculation is rife that the Fed will hike rates by another 25 bps bringing the U.S. interest rates to 2.25% – 2.50%.

Earlier this year, the Fed started off with a forecast of just three rate hikes for the year. However, the uptick in the GDP growth since the second quarter reinforced expectations of one more rate hike.

fed rate hike

Fed removes dovish language from its statement

Investors were mostly clued into how the Fed would tune its language in the forward guidance. Officials removed the dovish language from its report as well. The hawkish twist showed that officials would be looking at a faster pace of rate hikes to support the U.S. economy.

The removal of the word “definitely consequential” also gave way to speculation of a faster rate hike path. However, economists forecast that the Fed will stick to its current pace of one rate hike per quarter through next year. This comes following the growth outlook turning uncertain.

Fed revises growth forecasts

The central bank also released its staff economic projections on GDP, inflation and unemployment. According to the estimates, the outlook for GDP growth this year was revised higher from 2.8% to 3.1%.

The median growth projection for 2019 was revised to show a 2.5% growth up from 2.4% previously.

The forecasts for the unemployment rate were revised to show an increase to 3.7% from 3.6% that was previously predicted as the June projections.

“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the Fed said in its statement.

The central bank’s current interest rate cycle is in stark contrast to other central banks except for the Bank of Canada. However, signs of policy tightening are emerging elsewhere.

The ECB will be closing down its QE bond purchases by December this year. However, interest rate hikes are expected to come only sometime in the second half of next year. Meanwhile, the Bank of Japan is currently seen playing a wait and watch mode. However, investors continue to bet that the following policy action from the BoJ will be a removal of its QE program.

The Fed’s dot plot indicates that the current median rate for interest rates is around 3%. This was a slightly hawkish forecast, up from June’s projection of 2.9%.

The market expectations currently point to a 2.825% median rate by the end of 2019. This means that the markets are expecting one less rate hike compared to the Fed’s projections.

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