Question

Go to the internet and find a news article published within the last two months that discusses which direction interest rates are heading, summarize key points and post in the Discussions area. In your response please include the current and projected levels of interest rates.

Answer 1

Federal Reserve hikes rates, signals a more hawkish stance and a likely fourth hike in 2018

At its 12–13 June monetary policy meeting, the Federal Reserve’s Open Market Committee (FOMC) unanimously decided to raise its target range for the federal funds rate by 25 basis points, to between 1.75% and 2.00%. While this move was overwhelmingly expected by market analysts, observers were especially attentive to any signal the Fed might give to indicate the pace at which it plans to tighten policy going forward. In particular, both the markets and Fed members—as of their previous meeting, in May— had been divided as to whether to expect three or four rate hikes by the end of the year, and signs of a possible fourth hike this year were the main reason why the June FOMC meeting was so closely watched. On this front, the Fed sounded clearly more hawkish than in May, presenting a stronger growth and inflation outlook, as well as downwardly-revised unemployment forecasts.

The rate decision came against a backdrop of strong economic growth supported by high non-residential investment and a tightening labor market which, along with rising energy prices, is fanning inflationary pressures. Furthermore, the changes in the language implemented in the June communiqué show that the Fed saw a marked improvement compared to May. Notably, economic growth was now seen as “solid”—compared to “moderate” in May—while the unemployment rate, which was seen in May as “staying low”, now “declined” as of June. The Fed also noted that household spending “has picked up” after moderating in the first quarter of the year, consistent with a robust and balanced economic expansion relying equally on consumers and producers.

In addition, the Bank removed the phrase that “market-based measures of inflation compensation remain low”, signaling that underlying inflationary pressures have been picking up. Consequently, the institution more forcefully expressed its confidence that gradual rate increases would not hamper the sustained economic growth and tight labor market, while helping maintain inflation around the Fed’s symmetric 2% target over the medium term. Most crucially, for the first time this year, the June communiqué did not indicate that the Fed is worried about a downward surprise in growth or inflation. It also removed its forward guidance language indicating that the federal funds rate would likely remain below the long-term “equilibrium rate” for some time. This unequivocally signaled a more hawkish stance and provides a clear indication that interest rate hikes might continue higher and for longer than previously expected in 2019 and 2020.

Looking at the Committee’s Summary of Economic Projections, in which the economic forecasts and interest rate projections—the Fed’s “dot plot”—of each Committee member is compiled, also confirms a more hawkish monetary policy stance. Among the important changes since the last release of the document in March, Fed committee members marginally raised their 2018 GDP forecasts and lowered their unemployment forecasts for the 2018–2020 period. However, they left their long-term unemployment forecasts—which would correspond to the “natural” unemployment rate— unchanged, indicating that they see the economy as potentially overheating. Most noticed by the markets, Committee members’ median projection for the federal funds rate increased for both 2018 and 2019, indicating one more rate hike is now likely—bringing the total to four hikes this year. Although it is important to note that this increase in the median reflected only one Committee member changing position, it nevertheless signals an important shift in the discussion among Fed officials, particularly considering some of the most dovish members of the Committee are not voting this year.

Finally, Federal Reserve Chairman Jerome Powell announced a coming technical change during the June meeting. Starting in January 2019, the Fed will hold press conferences after each of its monetary policy meetings, instead of after every other meeting as is currently the case. This change should provide more flexibility for the institution to raise or cut interest rates at the precise moment it deems necessary. Under the current system, markets have become accustomed to expecting policy change announcements only at FOMC meetings which include a press conference, forcing the Fed to delay its policy announcement in order not to create unwarranted volatility spikes. This change, according to Powell, is “only about improving communication” and should thus have no impact on the number or pace of interest rate hikes.

United States Interest Rate Forecast

The U.S. Federal Reserve’s median interest rate projection for 2018 is now 2.4%, indicating four interest rate increases this year. Our panel concurs with this assessment, and expects the federal funds rate to end 2018 at 2.39%. For 2019, the Fed projects, on average, that the federal funds rate will end at 2.9%. FocusEconomics panelists see the federal funds rate ending the year at 3.02%.

United States - Interest Rate Data

	2013	2014	2015	2016	2017
Policy Interest Rate (%)	0.25	0.25	0.50	0.75	1.50

uesday June 19 2018			Actual	Previous	Consensus	Forecast
01:30 AM	US	Fed Williams Speech			+
03:30 AM	JM	Inflation Rate YoY MAY	3.1%	3.2%	+	3.3%
03:35 AM	UY	GDP Growth Rate YoY Q1	2.2%	2.0%	+	2.4%
04:00 AM	PA	GDP Growth Rate YoY Q1	4.2%	4.9%	+	3.5%
04:00 AM	PA	IMAE Economic Activity YoY APR	4.64%	2.86%	+	3.0%
04:30 PM	US	Fed Bullard Speech			+
06:00 PM	US	Building Permits MAY		1.364M	1.35M	1.35M
06:00 PM	US	Building Permits MoM MAY		-0.9%	-1.4%	-0.6%