Phillip Macro Update: 5 key points from March FOMC Meeting March 22, 2018 851

Five key points to note

1.       Federal Fund Rate: Federal Reserve, under new Chairman Jerome Powell, raised its Federal fund rate by 25 basis points to a range of 1.50% to 1.75%. The vote was unanimous at 8-0 and was largely anticipated by the markets. However, the highlight of the meeting was on the dot plot, which shows just one dot move away from having a fourth rate hike this year.

The median federal fund rate for 2019 was at 2.9%, up from 2.7% in the last meeting held in December 2017. This implied three more hikes next year. The median federal rate for 2020 is at 3.4%, which is also higher than the previous meeting of 3.1%. In short, we should experience 125 basis point of tightening over the next two years. In addition, the long-run neutral rate of interest rose to 2.9% from 2.8% previously.

2.       Economic Growth: The Fed economic outlook has strengthened in recent months, justifying the change in the fed fund rate. Powell attributed the more positive outlook to stimulative fiscal policy, better job gains, tightening labour market and accommodative financial conditions.

Jerome Powell noted the moderated growth in household spending and business investment earlier this year from their strong fourth-quarter readings. However, that did not deter an upward change in GDP projection. Growth is projected to be at 2.7% from 2.5% for 2018 and 2.4% in 2019, up from 2.1%.

3.       Unemployment: Unemployment for this year was forecasted to be lower at 3.8%, down from 3.9% in the December projection. The projected unemployment rate will fall to 3.6% for 2019 and 2020. This represents three years of unemployment rate well below their longer-run rate of 4.5%, which is the estimated rate for full employment when labour supply and demand is in balance.

4.       Inflation: Inflation is expected to be contained by rising interest rate. PCE headline inflation projection remains unchanged for 2018 and 2019 at 1.9% and 2.0% respectively.

For the first time, the Fed is forecasting inflation to rise above their target to 2.1% in 2020 for both PCE headline and core inflation.

5.       More frequent press conference: Mr Powell dropped a hint at more frequent press conference but refrained from linking more press conference to more rate hikes.

Figure 1: Dot plot (13 December 2017 vs. 21 March 2018)



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Pei Sai Teng
Investment Analyst
Phillip Securities Research Pte Ltd

Sai Teng covers the global macro research. He has more than 6 years investment experience primarily in portfolio construction and asset allocation. He graduated with Bachelor of Science in Banking and Finance from University of London.

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