Policy Normalization on Target: In a unanimous vote, the FOMC voted to raise the target range for the Fed Funds rate to 2.25% to 2.50%. As has been the case for recent changes, this 0.25% hike was well-telegraphed and generally expected by the market, though recent market turmoil had reduced the implied probability of action to roughly 65%. The quantitative tightening policy that’s allowing the Fed’s balance sheet to contract by up to $50 billion/month remains unchanged.
Growth: The official statement once again indicated that “economic activity has been rising at a strong rate,” driven primarily by robust household spending. It was noted that “growth of business fixed investment has moderated from its rapid pace earlier in the year,” as near-term tax benefits lapse and uncertainties related to trade mount. On balance, the median GDP expectations for 2018 and 2019 decreased slightly, with 2018’s projection down to 3.0%, a 10 bps decline, and 2019’s projection down 20 bps to 2.3%. Projections for 2020 and 2021 remained at 2.0% and 1.8% respectively, while the longer-run projection of 1.9% was 10 bps higher.
Unemployment: Consistent with recent payroll reports, “job gains have been strong” even as the FOMC proceeds with its policy adjustments. With 98 consecutive months of payroll expansion, the official unemployment rate dropped to 3.7% in November. The Committee increased its central tendency slightly for both 2019 and 2020, but ultimately decreased longer-run unemployment expectations to a median of 4.4%. There was no specific mention of wage growth, even as the recent 3.1% year-over-year increase in average hourly earnings represents the fastest pace in nearly a decade.
Inflation: The statement noted again how “Indicators of longer-term inflation expectations are little changed, on balance.” The recently-released Headline CPI reading for November was 2.2% year-over-year, a decline of 0.3% from October as energy prices softened. The Fed’s preferred measure (Core PCE) has recently dropped back to 1.8% but remains near the symmetric 2.0% target. The Committee will continue to assess “indicators of inflation pressures and inflation expectations.”
Rate Projections: The Committee’s forward-looking expectation for rates moved 0.25% lower. The “dots plot” is now pointing to two quarter-point hikes in 2019, for a total of eleven adjustments since policy normalization began in late-2015. The longer-run central tendency moved down to 2.75%, even as front-end rates are anticipated to rise 0.375% above that terminal level by 2020. Noticeably, the official press release added the modifier “some” to its view of the future, stating “some further gradual increases in the target range for the federal funds rate” would be consistent its dual mandate. The market has been discounting adjustments somewhat further out, with many observers only expecting one rate hike in 2019.
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