Mark your calendars for a rate hike on June 15. Although the Federal Reserve cut its estimate of the most likely path for interest rates this year, it still projected two rate hikes for later this year, which suggests one hike in June and then one at the end of the year after the election.
Today’s statement was more hawkish than the last statement in late January and the one dissent, from Kansas City Fed Bank President Esther George, was in favor of hiking rates by 25 basis points at today’s meeting.
What’s different in the statement? First, the Fed said the economy is growing at a “moderate pace,” which is better than the slowdown of late last year. Second, the Fed noted the recent pickup in inflation, which means it’s focused on “core” measures of inflation, which exclude food and energy. Third, although the Fed said global developments can pose risks, it took out the reference to “closely monitoring” those developments.
So why not raise rates at the next meeting on April 27? Why wait until June? In our view, economic fundamentals warrant a rate hike as soon as possible. However, today’s Fed statement did not add any language suggesting a rate hike is imminent, like it added in October 2015 when it referred to the “next meeting” and then raised rates at the very next meeting in December 2015.
Compared to the Fed’s projections back in December, today’s outlook suggests two fewer rate hikes this year (50 basis points versus 100 bp), the same amount of rate hikes in 2017 (100 bp) and one additional rate hike in 2018 (100-125 bp versus 75-100 bp). It also looks like the Fed still expects the end of the rate hike cycle to come in early 2019, with a peak rate of 3.25% (versus a prior estimate of 3.5%).
Slightly higher short-term interest rates are not going to derail the US expansion, but will help avoid the misallocation of capital that’s inevitable if short-term rates remain artificially low.
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