United States Monetary Policy September 2018

United States

United States: Federal Reserve hikes rate as expected in September, drops accommodative language and raises outlook

September 26, 2018

At its 25–26 September monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously decided to raise its target range for the federal funds rate by 25 basis points to between 2.00% and 2.25%. This move was overwhelmingly expected both by market participants and by FocusEconomics panelists.

Among the noteworthy elements of this September meeting, the Fed made an important wording change in its communiqué, removing the phrase “the stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation” while the rest of the statement remained a verbatim of the one released at the August meeting. This shows that FOMC members currently believe the fed funds rate to be close to its neutral point, where monetary policy neither stimulates nor restrains growth, and also see inflation now firmly anchored around the Fed’s 2% target.

The other key takeaways from the meeting were gleaned from the FOMC’s updated Summary of Economic Projections, in which the economic forecasts and interest rate projections—the Fed’s “dot plot”—of each Committee member are compiled. The most visible change from the previous update in June was a sharp revision of the FOMC’s economic forecast. The Committee’s median estimates for GDP growth in 2018 and 2019 were revised upwards by 0.3 and 0.1 percentage points, respectively, to 3.1% in 2018 and 2.5% in 2019. However, the projected unemployment rate in 2018 was also raised by 0.1 percentage points to 3.7%. The FOMC then sees growth slowing to 2.0% in 2020 and 1.8% in 2021 and the “longer run”, which corresponds to the potential growth rate.

Lastly, although the median projected path of interest rates from 2018 to 2020 was unchanged, the distribution of forecasts did see some notable changes. While in June FOMC members were almost evenly split, marginally tilting towards a fourth rate hike in 2018 (most likely to be delivered in December), as of September the additional hike was favored by Committee members by a three-to-one ratio, making it a highly probable occurrence.

For 2019, members became marginally more hawkish; however, they also became increasingly split regarding the path of interest rates in 2020. A larger share of the Committee now expects the fed funds rate to end 2020 between 3.50% and 3.75%. However, conversely, more members expect the rate to stabilize to between 3.00% and 3.25%, which indicates some level of uncertainty as to the lifespan of current momentum. This most likely reflects growing headwinds in 2019 and 2020, chiefly the fading effect of tax cuts enacted in December 2017, and an escalating trade war with China. Nevertheless, FOMC members seem to overwhelmingly view the economic impetus staying strong in coming quarters.

The U.S. Federal Reserve’s median interest rate projection for 2018 is 2.4%, indicating four interest rate increases this year. Our panel expects the federal funds rate to end 2018 at 2.46%. For 2019, the Fed projects, on average, that the federal funds rate will end at 3.1%. FocusEconomics panelists see the federal funds rate ending 2019 at 3.09%.


Author:, Economist

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United States Monetary Policy Chart


USA Monetary Policy September 2018

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 2.00% and 2.25%.
Source: Federal Reserve


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