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Powell’s first Fed meeting had the expected outcome – with the Fed funds target rate range increased by 25bps to 1.50 - 1.75% following a unanimous decision. But with all the chatter around NAIRU (the level of unemployment below which inflation starts to take off) and whether there will be a further dot added to the plot for 2018, the simple question is ‘what does this actually mean?’
As a quick summary, the projected Fed funds rate for 2020 is now 3.4%, putting the US well on track for interest rate normalization. The Fed also raised its estimate of the long term ‘neutral rate’, a potential sign that this hiking cycle could last longer than investors are currently expecting. Growth continues to put in a strong show and unemployment is now forecast to be at an exceptionally low 3.6% by the end of 2020.
Inflation looks set to move higher after a lengthy period below the 2% target. The only cloud amid all this optimism was the weakening USD; perhaps the market was expecting an even more hawkish tone, or maybe there are real worries that China is about to implement its countermeasures against the US steel tariffs. From our perspective as hedging advisors, it still feels like borrowers (and lenders) are relatively sanguine about the prospect of three Fed hikes this year. On the current trajectory, though, if it turns out that there aren’t three, it will be because there are more.
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