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Key Takeways from September FOMC meeting

27 Sep 2018

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Bottom line: The FOMC raised interest rates by 25bps, as widely expected, bringing the fed funds target range to 2.00%-2.25%, and continuing its gradual withdrawal of policy accommodation. As Jerome Powell recognised in his press conference, the economy has been coming in stronger than expected, with a strong labour market. FOMC participants revised upwardly their projections for 2018 real GDP growth. The unemployment rate is expected to remain well below the long-run rate of 4.5% over the 2018-2021 period. Despite tight labour market conditions, the FOMC sees PCE inflation stable near its long-term goal of 2%.

The “dot plot” also revealed few changes from June. A total of four 25 bps rates hikes is still expected this year, while 3 additional rates hikes continue to be projected for next year. The longer run dot has nevertheless been revised slightly upwards.

Risks to the economic outlook continue to be seen as roughly balanced. In his press conference, Jerome Powell said that the Federal Reserve has not seen so far measurable trade policy effects.

Details:

FOMC statement: FOMC continues to see the labour market as strengthening (with strong job gains and a low unemployment rate), while the economic activity is now seen as expanding at a strong rate (an upgrade from “solid” in June). Household spending and business fixed investment continued to be seen as growing strongly, with inflation near 2 percent.

Risks to the economic outlook continue to be roughly balanced (unchanged vs. June). The Committee decided to remove the “accommodative” language from the statement.

Economic projections: few changes as expected. The Committee revised upwardly its real GDP growth forecast for this year (to 3.1%, from 2.8% in June). For 2021, the economy is seen growing at the long-run rate of 1.8%, which remained unchanged. The unemployment rate is projected to remain well below the long-run rate of 4.5% over 2018-2021. Despite tight labour market conditions, the FOMC sees PCE inflation stable near its long-term goal of 2%.

“Dot plot”: FOMC participants continue to see a total of 4 rates hikes this year (supported by 12 participants vs. 8 participants in June). There were no changes for 2019 (3 rates hikes) and 2020 (1 additional rate hike). For 2021, the median dot implies no additional rate hike. However, the median longer-run dot was revised upwards to 3.00%, from 2.875% in June. Four participants pointed towards a total of 4 rates hikes in 2019, unchanged vs. the June meeting.

For further information, or to receive the PDF file, please contact +351 912 897 835 or research@fincor.pt

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