Fra BNP Paribas:
The June FOMC statement was decidedly hawkish, with upgrades to the statement and
forecasts, a steeper projected rate path, and the elimination of some forward guidance.
Chair Powell announced there will be press conferences following each meeting, beginning in January of next year.
We continue to expect the Fed to deliver two additional rate hikes in 2018, and continue to hike until they lose confidence in their outlook – for us this implies just one hike in 2019.
The FOMC delivered what we interpret as a hawkish hike at its June meeting. The Committee made several changes to its statement, upgrading its assessment of economic activity and marking down the unemployment rate, in addition to modifying forward guidance to reflect a more neutral policy regime. Additionally, participants on balance lifted their projected hiking path, with the median participant now seeing two more rate hikes this year and three next.
The FOMC is moving closer to a more neutral and flexible policy regime.
We are now aligned with the Committee as we continue to expect the FOMC to deliver two
more rate hikes this year. For 2019, we think the Fed may fall short of delivering its median
projection of three hikes as we expect it to be nimble and quick to pause its rate hikes in the face of slower growth and greater uncertainty – something we expect to see clear signs of toward the middle of the year. On the other hand, a more positive outlook (ie, more sustained above-trend growth) would result in more hikes.
Statement
The FOMC upgraded its assessment of the rate of economic activity to “solid” from
“moderate”. It also changed its language on the unemployment rate, now noting that it
has “declined” rather than “stayed low”.
The Committee modified its forward guidance. The Committee fully removed two
sentences, that it will carefully monitor inflation developments and that it expects the
fed funds rate to remain lower than its longer run levels for some time.
It also sees increases in fed funds being consistent with sustained expansion, versus
in the May FOMC statement where it referred to less specific “gradual adjustments” in
the stance of monetary policy.
The Committee added another “symmetric” to describe its 2 percent inflation objective
in the expected path of interest rates paragraph. The Committee appears to be making
itself as clear as possible that it will tolerate a modest inflation overshoot.
The risks to the outlook continued to be “roughly” balanced, likely in light of recent
international turbulence without an explicit move to “monitor international
developments closely” – a clarification it has used in the past.
Projections
The median dots for both 2018 and 2019 moved up by 25bp, with the 2018 median
now implying four total hikes for the year (versus three in March) and the 2019 median
still implying three.
The 2019 median dot is now at 3.125%, implying that the median Committee
participant sees it as appropriate to take policy to above neutral levels by the end of
next year (the Committee’s median longer run real rate is 0.875%, versus the implied
2019 real rate of 1.025%).
For 2019, four participants see it as appropriate for rates to reach 2.875% (versus five
in March), while four see 3.125% as appropriate (versus two in March), and three
seeing 3.375% as appropriate (the same as in March
