It is widely expected that the FOMC will deliver another 25 bp hike today, lifting the target range for the federal funds rate to 1.75-2.00%.
The post-meeting statement will once again likely highlight the positive economic outlook with labor market strength and confidence that inflation will run near the symmetric 2% target over the medium term. Moreover, we expect the policy-related paragraph to remain largely unchanged, reiterating in particular that the committee expects economic conditions to “evolve in a manner that will warrant further gradual increases in the federal funds rate.”
Risks to the outlook are likely to be seen once again as “roughly balanced”. While Fed Board of Governors member Lael Brainard highlighted in a recent speech that “recent developments pose some risk” to global growth, domestic indicators have remained very strong. Monthly payroll gains have averaged around 200,000 over the past six months, while the jobless rate has dropped to 3.8%. Moreover, the Atlanta Fed’s GDP tracker currently points to whopping 4.5% growth in the second quarter.
The latest developments mean that the Federal Reserve’s positive economic outlook has remained very much on track. As a result, we at most expect only minor adjustments to the growth and inflation projections in the updated Summary of Economic Projections. The one change that we could see – though it is likely to be a close call – is an upward shift in FOMC members’ median interest-rate projections (“dot”) for 2018. Rather than pointing to three hikes, as it did in March, the updated median dot could move up to indicate four hikes, which would be in line with our forecast. Similarly, the median estimate for the longer-run neutral rate could edge up from currently 2.9% to 3.0%.
The minutes of the May FOMC meeting telegraphed an upcoming change to the Fed’s guidance: “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” The reason is of course that after a series of rate hikes the actual fed funds rate has been getting closer to the neutral rate. And the median dots suggest that the actual rate will reach the longer-run neutral rate before year-end 2019. For these reasons, Brainard stated that this forward-guidance “is growing stale and may no longer serve its original purpose.” The corresponding change in wording may thus come as soon as at this meeting.
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