Fed raises rates for the second time this year
Fed raises rates for the second time this year
Summary of economic projections anticipates improved growth and a lower unemployment rate.
The Federal Reserve (Fed) hiked rates by 0.25% for the second time this year, lifting the range for the federal funds rate to 1.75% to 2.00%. The statement that accompanied the meeting reflected a strengthening of the economy. The Fed also increased the rate of interest on excess reserves by 0.20% with the intent of moving the effective federal funds rate closer to the middle of the band.
The Fed’s summary of economic projections (SEP) showed improvement in its forecast of growth and a lower expected unemployment rate. The most surprising change in the SEP was a drop in the Fed’s forecasted unemployment rate without a change in its long-term estimate of the non-inflationary rate of unemployment. This suggests the Fed views the economy as having less employment slack compared to its previous meeting. In addition, the median SEP now forecasts four interest rate hikes in 2018 (versus three previously). We do not view this as a significant change. Although the median interest rate forecast among Federal Open Market Committee members (“dot plot”) did shift up, on balance only one individual raised his or her forecast. Moreover, the additional hike forecasted for 2018 was pulled forward from 2020. In other words, the individual members maintained their expectation for the level of rates in 2020 at 3.4%.1 The net outcome was perceived as somewhat hawkish by the market, especially due to this change in the “dot plot.”
The Fed’s statement continued to express that economic conditions will likely warrant “only gradual increases in the federal funds rate.” There was no mention of the recent tightening in emerging market financial conditions. We continue to believe that the Fed will act somewhat cautiously (due to low prevailing levels of inflation) despite strong growth.
Yesterday’s inflation data, for example, pointed to a more moderate level overall. Although the year-over-year core rate increased by 2.2%, the three-month annualized rate is now below 1.8% — less than the Fed’s 2% target.2 In particular, the three-month annualized rate of change of the “sticky” core consumer price index (CPI), as measured by the Atlanta Federal Reserve Bank, fell from 2.9% to 2.3% between February and May.2 If this moderation in “sticky” core CPI proves to be persistent (as we expect), overall core CPI readings should begin to cool in the second half of this year and flexible core CPI readings should revert to lower historical levels.
One announcement made by US Federal Reserve Chair Jay Powell at the press conference was the Fed would begin having press conferences after every meeting starting in January. He cautioned that the change was an attempt to increase the level of communication and that it did not infer any change in the speed in which the Fed would adjust monetary policy.
Based on our moderating inflation outlook, we expect the Fed to hike three times this year. We believe the lower levels of inflation that we are likely to experience in the third and fourth quarters, coupled with gradually tightening financial conditions will lead the Fed to pause its hiking cycle to gauge the likelihood of future inflation pressures. In our view, this pause could drive the US yield curve to steepen and the US dollar to soften.
1 Source: Board of Governors of the Federal Reserve System, June 13, 2018.
2 Source: US Bureau of Labor Statistics, June 12, 2018.
This document has been prepared only for those persons to whom Invesco has provided it for informational purposes only. This document is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of thisdocument to any person without the consent of Invesco is prohibited.
This document may contain statements that are not purely historical in nature but are "forward-looking statements," which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/ or performance results will not be materially different or worse than those presented.
The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.
You should note that this information:
• may contain references to amounts which are not in local currencies;
• may contain financial information which is not prepared in accordance with the laws or practices of your country of residence;
• may not address risks associated with investment in foreign currency denominated investments; and
• does not address local tax issues.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.