New Fed chair Powell raises rates, growth and inflation forecasts
We still see scope for further interest rate rises from the Fed this year, following yesterday’s 25 basis point hike at the March meeting of the FOMC.
22 March 2018
As expected the Federal Reserve (Fed) raised interest rates by 25 basis points at the March Federal Open Market Committee (FOMC) meeting. The move increases the target range for the federal funds rate from 1.25%-1.5% to 1.5-1.75%.
At his first FOMC meeting, new Fed chair Jerome Powell also announced that the committee is pushing up its growth and inflation forecasts and increasing its expected path for interest rates. The higher rate profile (the dot plot) is concentrated beyond this year as the Fed look to gradually tighten into 2020. By the end of that year the median dot is at 3.4%.
We still see scope for more tightening this year as the tax cuts kick in and the Fed has to lean against fiscal policy. We expect four hikes this year and two next year, so our forecast matches the dot plots at the end of 2019.
It remains to be seen whether this this will be enough to restrain inflation. Much will depend on how rapidly public expenditure accelerates. Higher tariffs could also complicate the picture by adding to inflation, but weakening growth.
The risks to our forecasts seem skewed to the upside for interest rates. The broader market expects that the Fed will be all but finished tightening by the end of 2018. We think this is an overly dovish view.
 The dot plot is published after each Fed meeting. It shows the projections of the 16 members of the FOMC. Each dot represents a member’s view on where the fed funds rate should be at the end of the various calendar years shown.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.