FOMC Rate Decision and Statement Declines in Hawkish Tone…

In this weekend update, we look at the Federal Open Market Committee – FOMC rate decision and statement.

This week the Federal Open Market Committee (FOMC) left rates unchanged as was expected. The next rate hike is expected in June and this did not change much after the FOMC meeting. The change was in the Fed’s tone toward inflation. During the Fed statement they said: “Inflation on a 12-month basis is expected to run near the committee’s symmetric 2 percent objective over the medium term. The committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” This still has a hawkish tone but they also referenced the inflation rate as a symmetric 2 percent (target). Investors took this added term as an indication that the Fed was willing to allow inflation to surpass the 2 percent level and not treat the 2 percent rate as a maximum inflation rate but rather an area of acceptable inflation.

Despite this change of statement is seen as more flexibility and therefore less hawkish in monetary policy stance, the Fed Funds futures only adjusted slightly. The method we have used in the FX Hour has 2 rate hikes priced in and only a 26% probably of third hike by the end of 2018. This is roughly the same probability from before the FOMC announcement. Although there was some volatility in the expectations this week, the net change is immaterial. We will expect one rate hike next month and some additional strengthening of the U.S. dollar. As far as further rate hikes we will follow the Fed’s lead and say we are going to be data dependent.