As expected, the Fed hiked its benchmark short-term interest rate by 25 basis points (bps) to 1.75%–2.00%. In the 320 words of concise statement, the Fed moved to a more optimistic view on economic growth and higher inflation expectation. While we factored in a 25bps hike in June, our focus was more on the Fed’s tone as to how aggressive the FOMC would be in setting its monetary policy for the rest of the year. We are mixed over expectations of a fourth rate hike in 2018.

The only incremental surprise for us is that now, we can expect four rate hikes. The Fed has indicated the need to raise rates two more times in 2018, bringing the 2018 total to four increases. With the Fed now looking at another two rate hikes, it will accelerate the move from being neutral to more restrictive.

With a slightly more aggressive plan to tighten monetary policy this year than previously projected by the Fed, this will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of the strong predictors of recession. With a more aggressive tone by the Fed on its rate hike, we now expect a total of two rate hikes in 2019. We expect the policy rate to normalise at 2.75%– 3.00%. Thus, we should potentially see the yield curve invert in 1H2019.

• As expected, the Fed hiked its benchmark short-term interest rate by 25 basis points (bps) to 1.75%–2.00%. The Fed now sees GDP growing at 2.8% for 2018, in line with our projection. For 2019, the Fed is looking at a 2.4% GDP growth while our forecast is 2.2%. The Fed sees unemployment settling at 3.6%, slightly lower than ours of 3.7% for 2018. Headline inflation projections stayed at 2.1% for 2018 and 2019.

• In the 320 words of concise statement, the Fed moved to a more optimistic view on economic growth and higher inflation expectations. We found there was a lot to unpack from the 320-word statement. The Fed cited economic growth has been "rising at a solid rate”, an upgrade from "moderate" in May. The unemployment rate has "declined", compared to "stayed low", and household spending "has picked up", an upgrade from "moderated".

• While we factored in a 25bps hike in June, our focus was more on the Fed’s tone as to how aggressive the FOMC would be in setting its monetary policy for the rest of the year. We are mixed over expectations of a fourth rate hike in 2018. We felt the Fed featured multiple instances of more hawkish language during the meeting compared to May. In the May meeting, the Fed characterised rate hikes as "gradual adjustments" rather than "increases", and the "sustained expansion" portion was completely new.

• The only incremental surprise for us is that now, we can expect four rate hikes. The Fed has indicated the need to raise rates two more times in 2018, bringing the 2018 total to four increases. With the Fed now looking at another two rate hikes, it will accelerate the move from being neutral to more restrictive.

• With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions. With a more aggressive tone by the Fed on its rate hike, we now expect a total of two rate hikes in 2019. We expect the policy rate to normalise at 2.75% - 3.00%. Thus, we should potentially see the yield curve invert in the 1H2019.

Source: AmInvest Research - 14 Jun 2018