The Federal Reserve’s September statement, projections and press conference
were in line with our expectations and support
our view that the Fed will continue on a gradual trajectory of interest rate hikes.
PIMCO forecasts three additional policy rate hikes by the end of 2019, and
we expect the Fed to continue to run down its balance sheet before
announcing a change to balance sheet policy as early as the fourth quarter
of next year.
As was widely expected, today the Federal Open Market Committee (FOMC)
announced another increase in the federal funds rate target range to 2.0%–2.25%, marking the eighth rate hike of this cycle.
Notably absent in the statement was the (by now familiar) language, “The
stance of monetary policy remains accommodative,” though Chairman Jerome
Powell was careful to emphasize during his press conference that this does
not signal a change to the outlook for rate hikes.
In the new
Statement of Economic Projections, participants revised higher their 2018 GDP growth forecasts in response
to the robust readings on current economic activity since June, and the new
rate path forecasts (the “dot plot”) illustrated a strong committee
consensus for another rate hike in December.
Medium-term outlook unchanged
However, regarding the medium-term outlook for interest rates, the
committee provided markets with little news. The median expectation for the
fed funds rate in 2019 and 2020 was unchanged relative to the June
projection. Most FOMC participants continued to project the need for
modestly restrictive policy due to strength in labor markets, fiscal policy
stimulus and what many FOMC participants characterize as still favorable
financial conditions. The median projection for the longer-run fed funds
rate inched higher by 0.1 percentage points. However, the addition of Vice
Chairman Rich Clarida’s projection (and the removal of former New York Fed
President Bill Dudley’s) makes it difficult to ascertain whether the small
tick higher was the result of a change in any individual participant
estimates or a shift in the individuals included in the sample.
During the press conference, Chairman Powell reiterated the FOMC’s need to
balance the risks of moving too quickly and snuffing out the recovery with
moving too slowly and risking the economy overheats. A few times, Powell
mentioned long and variable lags of monetary policy, and the
uncertainty around estimates for the level of the longer-run neutral rate. He repeated
that central bankers don’t see many signs of overheating, and believes a
continued gradual pace of rate hikes will allow central bankers time to
assess how the economy is reacting to the cumulative increase in interest
rates to date.
For our detailed views on the interest rate outlook and its implications for investors, please see “Rise Above Rising Rates."
Tiffany Wilding is a PIMCO economist focusing on the U.S. and is a regular contributor to the PIMCO Blog.