FOMC Statement and Forecasts

June 13, 2018

Today’s FOMC statement raises the federal funds rate by 25 basis points to a target of 1.75-2.0%, depicts a tighter labor market, upgrades the assessment of personal consumption recent conditions, and deletes the prior observation that market-based measures of inflation are low. The statement also introduces the assertion that inflation consistent with the Committee’s symmetric 2% medium-term objective is close at hand. Twice in the one page statement, the word “symmetric” qualifies the inflation goal. The biggest modification of this statement is the deletion from forward guidance of language that previously opined that policymakers “expect that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

The extensive deletion underscores that policy normalization has moved into a new phase that requires a need for greater flexibility. While inflation above 2.0% is likely to occur for awhile, it also seems inevitable that the funds rate will move beyond a neutral level into a restrained stance at some point during the next twelve months.

New forecasts quantify the above interpretation. The median federal funds rate projection has been raised by 0.3 percentage points to 2.4% for the year 2018, by 0.2 percentage points to 3.1% for next year and left at 3.4% in 2020. Thus, it will be above the perceived longer-run 2.9% in both 2019 and 2018.

Macroeconomic forecasts for 2018 were increased in the case of economic growth to 2.8% in in the case of PCE inflation to 2.1% overall and 2.0% core. The projected jobless rate was lowered for 2018 to 3.6% from 3.8% and to 3.5% in both 2019 and 2020 from 3.6% even though the longer-run assumed jobless rate was not changed from 4.5%.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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