As expected the Federal Reserve (Fed) raised interest rates by 25 basis points at the March Federal Open Market Committee (FOMC) meeting. The move increases the target range for the federal funds rate from 1.25%-1.5% to 1.5-1.75%.
At his first FOMC meeting, new Fed chair Jerome Powell also announced that the committee is pushing up its growth and inflation forecasts and increasing its expected path for interest rates. The higher rate profile (the dot plot 1) is concentrated beyond this year as the Fed look to gradually tighten into 2020. By the end of that year the median dot is at 3.4%.
We still see scope for more tightening this year as the tax cuts kick in and the Fed has to lean against fiscal policy. We expect four hikes this year and two next year, so our forecast matches the dot plots at the end of 2019.
It remains to be seen whether this this will be enough to restrain inflation. Much will depend on how rapidly public expenditure accelerates. Higher tariffs could also complicate the picture by adding to inflation, but weakening growth.
The risks to our forecasts seem skewed to the upside for interest rates. The broader market expects that the Fed will be all but finished tightening by the end of 2018. We think this is an overly dovish view.
The above article was previously published by Schroders on 22nd March 2018
1 The dot plot is published after each Fed meeting. It shows the projections of the 16 members of the FOMC. Each dot represents a member’s view on where the fed funds rate should be at the end of the various calendar years shown.