No Surprises in the Decision, Another 25bps Rate Hike in December

The US Federal Reserve (US Fed) raised its Federal funds rate (FFR) by another 25bps to be in the range of 2.00-2.25% in the latest September FOMC meeting, as widely expected. This decision marks the third rate hike for the year after the June and March meetings. The US Fed made only minor changes in the language to the policy statement, and widely maintained its assessment on the economy from the previous FOMC meeting in August, possibly reaffirming its view for another 25 bps rate hike in the 7-8 November or 18-19 December meeting.

On the economy, the Fed guided that “labour market has continued to strengthen and that economic activity has been rising at a strong rate. Household spending and business fixed investment have grown strongly.” This may reflect that the US Fed may be currently satisfied with the market’s expectation on its future direction of the monetary policy. On the inflation front. US Fed noted that “both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.” In its latest assessment, the Fed removed the sentence in the statement stating that “the stance of monetary policy remains accommodative,” which was usually mentioned after the policy decision statement, possibly implying that the current level of FFR is close to the Fed’s opinion of a neutral rate for the US economy, which was quoted at the range of 2.3-3.00%. Moving forward, we believe further rate hikes will focus on the performance of the US economy, and it remains strong above its potential output.

In the latest assumption on the dot plots analysis, the US Fed maintained its expectation that the FFR will be at 2.25-2.50% by end 2018, and increased to 3.0-3.25% by end 2019 (another three 25bps rate hikes in 2019) and 3.25-3.50% by end 2020. In the latest FOMC Summary of Economic Projection, the Fed revised higher its expectation of US economic growth in 2018 from a range of 2.7-3.0% in June’s projection to a range of 3.0-3.2%, while the economic growth in 2019 was revised from a range of 2.2-2.6% in June’s projection to a range of 2.4- 2.7%. The Fed lowered its unemployment expectation from a range of 3.6- 3.7% in its previous expectation to 3.7%, and at a range of 3.4-3.6% for 2019. The US Fed maintained its overall view of the inflation expectation, where the core PCE is expected to increase to 2.1% next year, which also shows that the Fed is maintaining its expectation that the US economy will experience some inflationary pressure next year. US Fed also noted that risks to the economic outlook appear roughly balanced, despite the current escalating trade war between US and China.

Source: Affin Hwang Research - 27 Sept 2018