Federal Reserve hikes rate for the 9th time since 2015

On 19 December 2018, Fed Chairman Jerome Powell announced the anticipated rate hike and reiterating the central bank’s intent that the balance sheet reduction program will proceed as planned. This is the 9th rate hike since the cycle began in December 2015. bringing the Fed Fund Rate to 2.5%. Projections for the median federal funds rate for 2019 and 2020 have been revised downwards from the September forecast.

The median federal fund rate for 2019 was down from 3.1% to 2.9% from the September meeting. Whereas the median federal funds rate for 2020 has declined from 3.4% to 3.1%, which is the forecasted rate back in December 2017. In addition, the central bank lowered the outlook for the long-run neutral rate of interest, from 3.0% in September to 2.8%.

Five key points to note

1. Dot plot shows two hikes for next year: FOMC raised its Federal fund rate by 25 basis points to a range of 2.25% to 2.5%. The dot plot projection showed 15 members of the Federal Reserve expecting median dot projection for the Fed rate in 2019 at 2.875%. This implies that there would be two rate hikes projected for next year, down from 3 as forecasted in September. Moreover, the median dot projection for 2020 is down from 3.375% to 3.125%, implying only one rate hike in 2020.

2. Economic growth: The Fed has upgraded its GDP forecast for 2018 from 3.0% to 3.1%, which is consistent with its statement citing that there is “sustained expansion of economic activity”. However, it has revised the GDP forecast for 2019 downwards, from 2.5% to 2.3%, further confirming that the economy will be slowing. Although Jerome Powell proclaimed confidence in the economy, he acknowledged that the recent sell-off of the US stock market shows signs of dampening economic growth. The Fed Chair also mentioned that there is significant uncertainty in terms of the direction of future rate increases.

3. Unemployment: The unemployment rate for this year and 2019 remain unchanged from the September projections. The longer-run rate of unemployment, which is the estimated rate for full employment when labour supply and demand is in balance, was revised downwards from 4.5% to 4.4%.

4. Inflation: Both the PCE Inflation and core PCE Inflation are projected to reach 1.9% by year-end. PCE inflation projection for 2019 fell from 2.0% to 1.9%, while core PCE Inflation forecast declined from 2.1% to 2%. The preferred inflation measurement by FOMC, core PCE Inflation, is currently at 1.8%, near the 2% target.

5. Change of tone in statement: Comparing the current statement with the one in November, the word “some” was added to describe the future course of rate hikes, signalling a more dovish stance and less rate hikes in the medium run. The Fed also mentioned in the statement that it now “judges” rate increases to be appropriate whereas November’s said “expects.” Last but not least, the statement added that the Committee will “continue to monitor global economic and financial developments and assess their implications for the economic outlook”, implying that the central bank is more cautious of the softening economy and will tread lightly ahead.