NEW YORK — The Federal Reserve today announced an interest rate hike that brings the target range for the Fed funds rate to between 1.00 to 1.25 percent, RBC Economics reported.
The statement was upbeat on the economic backdrop and labor market conditions. The committee is “monitoring inflation developments closely” although that is not new to this policy statement, said Economist Josh Nye.
Updated projections show slightly stronger growth is expected this year. Inflation was revised lower for 2017, but is forecast to return to 2 percent thereafter.
The unemployment rate has been revised lower by 0.2-0.3 percentage points over the forecast horizon. The rate is seen remaining below its longer run level, which was revised down to 4.6 percent.
The Fed funds “dot plot” was little changed. Most committee members expect another rate hike this year, and a median of three more increases are seen as appropriate next year, Nye explained.
“The Fed expects to begin normalizing its balance sheet this year. The announced monthly caps on holdings that will not be reinvested imply a gradual and predictable shrinking of asset holdings,” he said.
“Today’s rate hike was fully expected and the Fed made few waves with their policy statement and updated projections,” said Nye. “There were further details on the committee’s plan to begin normalizing the balance sheet, a process they said is likely to start this year.
“The Fed is going to lengths to prime markets for a change in their reinvestment policy, likely with 2013’s ‘taper tantrum’ in mind,” he added. “Their cautious approach is consistent with our view that the central bank will take a pass on raising rates in September when we expect they will begin tapering.
“Aside from that pause, we look for the Fed to continue gradually raising rates and think today’s meeting reinforces our forecast. Federal Reserve Chair Janet Yellen downplayed unexpectedly low inflation readings in recent months, attributing much of the shortfall to one-off price declines,” said Nye. “She also indicated that conditions are in place for inflation to move higher.
“We agree that a tight labor market and above-trend growth should help reverse recent moderation in inflation,” he explained. “As such, further removal of accommodation is needed to keep monetary policy from falling behind the curve.”
SOURCE: RBC Economics press release