US: Fed hikes as expected, but turns more hawkish

5 min

As expected the Federal Reserve raised the Fed Funds rate from a range of 1.25% - 1.50% to 1.50% - 1.75% yesterday. The accompanying statement, the updated forecasts, and Powell’s press conference all took a more hawkish stance. The statement said “The economic outlook has strengthened in recent months” and the forecasts were revised up significantly. 2018 GDP growth was revised up from +2.5% to +2.7%, and 2019 was revised up from +2.1% to +2.4%. The unemployment rate was revised down from 3.9% to 3.8% for 2018 and more sharply from 3.9% to 3.6% for 2019. The forecasts for inflation, however, remained virtually unchanged at 1.9% for 2018 and 2.1% for 2019. As a result of the more hawkish bias, the Fed could raise rates a fourth time this year. Eight voting members expect three hikes or less. But seven members now expect four hikes or more. In addition, the forecast for 2019 is now three hikes instead of two. At present, we don’t expect the more hawkish bias to materially affect our 2018 growth forecast of +2.9%. But the Fed should now be watched even more carefully. If finan¬cial markets dislike the more hawkish bias, it could affect consumers and be a drag on the economy.