FOMC’S STATEMENT LESS HAWKISH THAN EXPECTED

As expected, the Federal Open Market Committee raised the US policy rate on March 21 to a range of 1.50-1.75%. The decision was made unanimously, 8-0. It was the first time for new Fed chairman Jerome Powell to announce the FOMC’s decision, and the market had anticipated a hawkish tone. But the tone of the statement was less hawkish than Mr Powell had signalled in a February speech. Even so, the FOMC’s economic outlook was revised up. Here are five differences between the FOMC meeting in December and the one this month: 1. In December, the FOMC said economic activity had been rising at a “solid” rate. But in the March FOMC statement they used the word “moderate” and added that “the economic outlook has strengthened in recent months”. Inflation on a 12-month basis is expected to rise in the “coming months”, as opposed to “this year” in the December statement, hinting that inflation may rise faster than earlier thought. 2. The Fed adjusted the so-called Dot Plot, which signals what the Fed committee thinks. The baseline for 2018 is still three hikes, and the median federal funds rate for 2018 is maintained at 2.125%. But Fed members adjusted their Dot Plot for 2019 and 2020. The committee’s view is that by the end of 2019, the federal funds rate should be about 2.9%, implying three hikes, versus the last statement in which they saw just two hikes. In 2020, the federal funds rate should be about 3.4%, implying two hikes, up from 3.1% in the earlier statement. 3. The GDP forecast has been revised up from the last statement in December, to 2.75% in 2018, 2.4% in 2019 and 1.9% in 2020. 4. On inflation, the chairman said that “there is no sense in the data that we are on the cusp of an acceleration in inflation”. The Fed revised up slightly the core PCE and non-core PCE index projections for 2018. 5. The puzzle lies in the very low unemployment rate. Jobs keep being added to the US labour market. Non-farm payrolls in February totalled 313,000. The unemployment rate is 4.1%, but the FOMC expects the rate to fall to 3.8% by the end of 2018. In the long run, the Fed sees unemployment at about 4.5%, a bit lower than December’s forecast. On March 21, 3M LIBOR was 2.271%, up from 2.248% the night before, and the 10-year US treasury note’s yield was 2.883%, a slight drop, due to the March statement’s less hawkish tone.