United States Monetary Policy March 2017

United States

United States: Fed delivers second rate hike in three months and further rises lie on horizon

Federal Reserve Chair Yellen is making good on the Fed’s pledge to accelerate the process of scaling back accommodation as the U.S. nears full employment and inflation approaches the Reserve’s target. At its second monetary policy meeting of the year, held on 14–15 March, the Federal Reserve’s Open Market Committee (FOMC) announced its decision to raise the target of the Federal Funds rate from a range of between 0.50% and 0.75% to between 0.75% and 1.00%. The decision came as no surprise to markets and analysts and it marks the second hike in U.S. interest rates in three months.

The FOMC made only modest changes to its statement relative to the previous one in February. Against a backdrop of buoyant business and consumer sentiment surveys but mixed hard macroeconomic data, the Committee signaled that the economy has “continued to expand at a moderate pace”, with risks to the outlook still “roughly balanced”. The statement did however upgrade the description of inflation, noting that headline inflation was nearing the 2.0% target. In a bid to strike a less hawkish tone, the Fed described its inflation goal as “symmetric”, easing fears that the pace of interest rate normalization could accelerate on the heels of headline inflation exceeding the target. Tom Kenny, Senior Economist at ANZ Research, comments on this change:

“This language (…) makes it clear that the central bank can tolerate both undershoot and overshoot on its 2% inflation target. This is significant in so far as the headline PCE is likely to pass above 2% temporarily as energy price weakness from last year washes out.”

Indeed, the immediate market reaction has been for the most part dovish. Both the U.S. dollar and Treasury yields for multiple maturities have moved lower and equities higher. Markets seemed relieved to see that the Federal Reserve was not flagging any plan to speed up the pace of monetary tightening despite continued progress toward its dual mandate of maximizing employment and stabilizing prices. An important caveat, however, remains the distinct possibility of fiscal policy becoming increasingly expansionary, which could accelerate the pace of interest rate normalization for the Fed. The FOMC’s ‘dot plot’—which charts Fed members’ expectations for future policy rates—still sees three interest rate hikes in 2017 and 2018, but an increasing number of participants expecting at least three rises could tilt the balance and shift the median expectation for 2017 to four hikes.

In the summary of economic projections, the FOMC barely made any changes to its forecasts. GDP growth was unchanged from December’s projections for both 2017 and 2019 and only slightly revised upwards for 2018. The longer-run unemployment rate forecast edged down to 4.7% from 4.8%, with only core inflation edging up in 2017 compared to December’s forecasts.

Fed members have insistently reaffirmed the commitment to a cautious and gradual approach to monetary normalization, but the likelihood of an expansionary fiscal plan being in the making could thwart the Fed’s prudent approach to higher interest rates and accelerate the pace of convergence to the long-run fed funds rate median of 3.0%.

The U.S. Federal Reserve’s interest rate median projection forecast for 2017 averages 1.4%, which is slightly above the Consensus view of our panelists. The panel sees the federal funds rate averaging 1.3% at the end of 2017. For next year, the Fed projects, on average, that the federal funds rate will end 2018 at 2.1%. The Consensus view among analysts is that the Fed funds rate will end 2018 at 1.9%.


Author:, Economist

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USA Monetary Policy March 2017 0

Note: Total assets on the balance sheet of the Federal Reserve in USD billion and Federal Funds Target Rate in %. Current rate set at a range of between 0.75% and 1.00%.
Source: Federal Reserve


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