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First Cut: FOMC Meeting Statement and Summary of Economic Projections

Other than the language associated with the rate hike, the statement from the December 18-19 FOMC meeting was on the whole little changed from the November 7-8 meeting statement. The major change was a shift away from “expects” to “judges” in regard to “some further gradual increases” in short-term rates. Combined with the “roughly balanced” risks and the addition of the “but will continue to monitor global economic and financial developments and assess their implications for the economic outlook,” the Committee is stressing its data dependence and sounding a more dovish note for the rate outlook.

Change in rates were as expected with the fed funds target rate range increased 25 basis points from 2.00%-2.25% to 2.25%-2.50%. It is likely that Chair Powelll will be asked if the rate is now at or close to neutral in light of the updates to the Summary of Economic Projections (SEP).

The discount rate and Overnight Reverse Repurchase offer rate (ON RRP) were both increased 25 basis points in line with the funds rate. The smaller 20 basis point increase in the Interest on Excess Reserves (IOER) was a technical decision. The implementation note said, “Setting the interest rate paid on required and excess reserve balances 10 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.”

Backing up the dovish tone of the statement is the projections materials in the Summary of Economic Projections.  A slightly more downbeat outlook for growth next year and a tick down in inflation put the prospect of further removal of accommodation at a lower pace in spite of the expected continued strength in the labor market. It appears the consensus is now for two hikes next near and perhaps one in 2020. Also, lowering the longer-run expectation to 2.8% for the fed funds midpoint from 3.0% suggests the rate is nearer neutral than previously thought.

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