[lg policy] Fed hikes interest rates, raises its economic outlook and drops 'accommodative' language

Harold Schiffman haroldfs at gmail.com
Thu Sep 27 10:35:39 EDT 2018


Fed hikes interest rates, raises its economic outlook and drops
'accommodative' language

   - The Federal Open Market Committee increases the fed funds rate 25
   basis points to a range 2 percent to 2.25 percent.
   - The FOMC also projects one more hike before the end of the year and
   three in 2019.
   - Wednesday's statement drops language saying that "the stance of
   monetary policy remains accommodative."
   - Fed officials collectively estimate gross domestic product to rise 3.1
   percent in 2018, an upward revision from the 2.8 projection in June. The
   forecast for 2019 also moved higher by 0.1 percentage points to 2.5 percent.

Jeff Cox <https://www.cnbc.com/jeff-cox/> | @JeffCoxCNBCcom
<https://twitter.com/JeffCoxCNBCcom>
Published 20 Hours Ago Updated 18 Hours Ago CNBC.com




















[image: How a Fed rate hike affects you]
<https://www.cnbc.com/video/2018/09/26/federal-reserve-rate-hike-consumer-impact.html>
How a Fed rate hike affects you   21 Hours Ago | 02:53
<https://www.cnbc.com/video/2018/09/26/federal-reserve-rate-hike-consumer-impact.html>

The Federal Reserve <https://www.cnbc.com/federal-reserve/> hiked its
benchmark interest rate a quarter point Wednesday, upped its anticipation
for economic growth this year and next, and provided a road map of what
lies ahead through 2021.

As widely anticipated, the policymaking Federal Open Market Committee
increased the fed funds rate 25 basis points. That now takes the rate to a
range of 2 percent to 2.25 percent, where it last was in April 2008. This
is the eighth increase since the Fed began normalizing policy in December
2015.

The funds rate serves as the baseline for multiple forms of consumer debt
as well as savings accounts and CD rates. The funds rate increase will be
felt immediately in the prime rate and increase credit card charges, but
its impact in other areas usually is more incremental.

Along with the rate increase, the FOMC continued to project one more hike
before the end of the year and three in 2019.

The Fed had kept its target rate anchored near zero from December 2008
until this hiking cycle began as it sought to bring the economy out of the
financial crisis slump. Since then, the central bank has sought to
normalize policy through consistent but gradual increases.
[image: Federal Reserve Chairman Jerome Powell testifies before a House
Financial Services Committee hearing on the “Semiannual Monetary Policy
Report to Congress," at the Rayburn House Office Building in Washington,
U.S., July 18, 2018.]
<https://www.cnbc.com/video/2018/09/26/federal-reserve-raises-rates.html>
Federal Reserve raises rates   19 Hours Ago | 02:11
<https://www.cnbc.com/video/2018/09/26/federal-reserve-raises-rates.html>

The latest step in the normalization process, along with the rate move,
came with Wednesday's statement, in which the committee dropped language
saying that "the stance of monetary policy remains accommodative."

Markets had been watching to see whether that phrase would be excised after
members had indicated at the August meeting that it would be time soon to
make that move.

Committee members also indicated that it's likely the funds rate would
remain for two years above what they term the long-term "neutral" rate that
is neither restrictive nor stimulative.

Outside of the rate hike and drop of the phrase, the statement was verbatim
from the August meeting.
Economic outlook

Along with the move, committee members showed a more optimistic view of the
U.S. economy.

In the latest installment of their quarterly projections, FOMC officials
collectively estimated gross domestic product to rise 3.1 percent in 2018,
an upward revision from the 2.8 projection back in June.

The forecast for 2019 also moved higher by 0.1 percentage points to 2.5
percent. The estimate for 2020 remained at 2 percent.

Committee members for the first time released their 2021 projections, which
see the economy growing at a 1.8 percent rate, aligning with the long-range
forecast.

"The Fed is looking at an economy that in 2021 is slowing, and this is the
first time they've said that," said Mark Cabana, head of U.S. short rate
strategy at Bank of America Merrill Lynch. "I think the confidence about
how long the economy is expected to stay strong is waning."
<https://www.cnbc.com/video/2018/09/26/fed-removes-accommodative-from-policy-language.html>
Fed removes 'accommodative' from policy language   19 Hours Ago | 04:17
<https://www.cnbc.com/video/2018/09/26/fed-removes-accommodative-from-policy-language.html>

The unemployment rate forecast ticked higher to 3.7 percent from June's
estimate of 3.6 percent.

Forecasts for interest rate moves ahead remain unchanged from June, though
the expectations for individual members, expressed through the so-called
dot plot, showed a greater range of estimates.

There was some upward drift in the grid. A dot widely believed to belong to
St. Louis Fed President James Bullard, for instance, rose a quarter point
for 2018. Two more hawkish dots for 2020 that saw the range between 4
percent and 4.25 percent drifted lower, though the dots overall for that
year shifted higher.

The committee still indicated another rate hike before the end of 2018 and
likely three more in 2019. There's one more increase factored in for 2020,
bringing the median range to 3.4 percent where it is expected to stay
through 2021 before settling to 3 percent over the longer run, an increase
from June's projection of 2.9 percent.

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 Harold F. Schiffman

Professor Emeritus of
 Dravidian Linguistics and Culture
Dept. of South Asia Studies
University of Pennsylvania
Philadelphia, PA 19104-6305

Phone:  (215) 898-7475
Fax:  (215) 573-2138

Email:  haroldfs at gmail.com
http://ccat.sas.upenn.edu/~haroldfs/

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