Federal Reserve Makes Good on its December 2016 Projection

Back in December of 2016, the Federal Open Market Committee (FOMC) projected three increases in the Federal Funds target rate through its dot plot released after the meeting. Fast forward to December of 2017, and the FOMC has made good on that forecast at its final meeting by raising the Fed Funds target rate for a third time this year. This is the fifth time that the Federal Reserve has increased the target rate by 25 basis points since it began raising rates back in December 2014. After almost a decade of the Fed Funds target rate pegged at essentially zero, the FOMC has now increased rates to a range of 1.25 – 1.50 percent.

Following last week’s meeting, the FOMC released an updated dot plot forecasting additional interest rate increases in 2018 and 2019 as well as its economic assessment of growth, employment, and inflation. The Federal Reserve is forecasting three more increases in the Fed Funds target rate for 2018 followed by two additional increases in 2019. But once again, the market is discounting the likelihood that the FOMC will make good on its forecast. The Fed Funds futures market does not see another increase in the target rate until June of 2018 and predicts, at most, two hikes by the FOMC next year.

The FOMC increased its forecast for the rate of growth in 2018 up to 2.5 percent from 2.1 percent previously. It is also forecasting lower unemployment at 3.9 percent for 2018 and 2019 versus its prior forecast of 4.1 percent. The forecast for inflation remains below the Fed’s target of 2.0 percent for the foreseeable future; however, the Fed believes inflation will move closer to its target over the medium term.

Michigan CLASS is anticipating increasing rates in 2018 and 2019 based on comments from members of the FOMC as well as the Committee itself. Jerome Powell is expected to be the next FOMC Chair as Janet Yellen’s term will expire in February 2018, and she was not reappointed. The future level of interest rates will be dependent on many variables including economic activity, fiscal policy, and unforeseen geopolitical events.

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