Macro of the Week – Fed hikes rates, more expected

Mon 26 Mar 2018

As widely expected the FOMC raised the Fed Funds Rate target by 0.25% to a range of 1.5% – 1.75%, in what was a unanimous decision by the committee. It was the sixth rate hike since the GFC as the central bank looks to ‘normalise’ interest rate policy and was the first major decision under the new Chair Jay Powell. The Fed has also increased its GDP forecast by 0.2% for 2018 to 2.7% and by 0.3% to 2.4% for 2019, which was part of the justification for the move. However in a slightly contradictory move, growth was moved from “solid” to “moderate”. “Fiscal policy has become more simulative, on-going job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative,” Powell said in his first news conference. Core inflation estimates were unchanged at 1.9% for 2018 and 2.1% for 2019, which underlines views that the Fed is acting for normalisation purposes rather than due to inflation concerns. The Fed anticipates hiking rates three times in total in 2018, although a fourth rate hike is a possibility, which has not happened since 2006. In response to the rate hike 10Y Treasury yields rose to 2.92% before falling later in the week due to increased fears of a trade war.