Fed Watch: Fed steps up the pace

03-15-2017

After just one hike in each of the last two calendar years, the Federal Reserve is starting off 2017 by seemingly picking up the pace. The Federal Open Market Committee (FOMC) today announced a 25 basis-point increase in the federal funds target rate to a range of 0.75% to 1%. The Fed had signaled this in the weeks before the meeting and the market had anticipated today’s result, thus shifting focus to the other aspects of today’s release, including the Fed’s economic and policy projections. 

The monetary policy projections—better known as the dot plot of the expected fed funds rate—did not move much. It reiterated the Fed’s projection of three tightenings this calendar year (one down, two to go), affirmed it expects the endpoint for the fed funds rate in this tightening cycle to be around 3% (which is low relative to history), and indicated that it expects to get there by the end of 2019. In addition, the Fed’s GDP and inflation projections held steady relative to the December meeting, with the notable exception of a move down by a tick to 4.7% for the median long-run unemployment rate. Lastly, the post-meeting statement implied the Fed has greater confidence that inflation is moving toward and will stabilize around 2%, and that gradual tightening in the labor market and moderate U.S. growth will persist.

Notably, the Treasury market rallied on the release, with yields falling across the yield curve as fears that the Fed would signal a more hawkish stance at this meeting were not realized and the Fed reaffirmed its gradual approach to policy tightening.