The Fed: No longer accommodative – at least on paper
Author: Tom Nakamura
September 28, 2018
The U.S. Federal Reserve may have dropped the word “accommodative” on paper, but the central bank’s trajectory of future rate increases remains relatively unchanged and should continue to be supportive of risk assets in the near term while putting a potential damper on U.S. dollar strength.
In a press conference following the Fed’s latest 25 basis point hike this week, Fed Chairman Jerome Powell said the removal of “accommodative” from the Federal Open Market Committee’s (FOMC) statement was because its usefulness as a forward guidance tool had been exhausted. Despite the word’s removal, the Fed has not signalled a change in the rate path, he added, while also stating that monetary policy is still accommodative given where current interest rates lie.
To that end, it’s true that not much has changed regarding the Fed’s dot path of implied interest rates in 2019 and 2020. It continues to forecast three 25 basis point hikes next year and one more of 25 basis points the following year. Moreover, no rate hike is currently forecast for 2021 despite a wide range of projections that demonstrate the considerable uncertainty that Fed members face longer term.
Powell said the Fed is “trying to balance between moving too fast and slow.” but would also adjust its policy if necessary in the future. This includes a change in the path of inflation, which seems “to be fairly nonreactive” to economic slack at the moment, as well as a weakening economy. Interestingly, the central bank would also “react to a significant, lasting market correction.”
For now, however, the Fed continues to be on a gradual hiking path despite the U.S. economy’s stronger than expected growth this year. And while U.S. President Trump expresses his disdain about another rate hike, investors should feel relatively good about the central bank’s measured approach.
Tom Nakamura is vice president, currency management & strategy at AGF Investments Inc. He is a regular contributor to the AGF Perspectives blog.
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