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As widely expected, the FOMC raised the Fed funds (FF) target by 25 bps to a range of 0.75% to 1.00%. The Fed's median projection for the FF rate at the end of 2017 was 1.4%, implying two additional 25 bps rate hikes this year. This is unchanged from the December projection as was the projection for yearend 2018 at 2.1%, implying 3 additional hikes next year. The longer-run fed funds rate projection remained at 3.0%.
US economic performance is likely to warrant further gradual increases in the federal funds rate. Chair Yellen reiterated her view that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."
As widely expected, the FOMC left its monetary policy unchanged with the Fed funds rate target range maintained at 0.5% to 0.75% at its February meeting. The Fed's balance sheet reinvestment policies were also unchanged.
The issue of populist movements does not stop at elections. In the longer term, it poses the problem of the legitimacy of elites and solutions for reconciling democracy and globalisation. In fact, we have now entered into a political cycle, ie, a point in history where politics has taken over from the economy and is imposing its own rationality. There is no going back: we are seing a transition of both internal and external political equilibrium.
October nonfarm payrolls rose by 161K, which is likely closer to a sustainable pace of employment generation going forward with the economy near full employment. The October unemployment rate crept down to 4.9% while the participation rate slipped to 62.8%. October average hourly earnings rose 0.4% MoM, and accelerated to a 2.8% annual pace (after revisions to September). We expect earnings to strengthen in the months ahead with the economy close to full employment.
We expect the FOMC to keep policy unchanged at its November 2 meeting with the Fed funds target range maintained at 0.25% to 0.5% and no change in the FOMC's portfolio reinvestment policies. We continue to look for the FOMC to hike rates at its December 14 meeting as part of a gradual pace of rate normalization, including two additional 25 bps rate hikes during 2017.
The FOMC, as widely expected, opted for unchanged policy at its September meeting with the Fed funds target range maintained at 0.25% to 0.50%. Market participants saw a relatively low probability for a rate hike with policymakers split over the near-term rate normalization path. We look for the FOMC to hike the Fed funds rate by 25 bps on 14- December. Chair Yellen's comment that the case for a rate hike has strengthened was echoed in the statement. Moreover, the FOMC noted that the "near-term risks to the economic outlook appear roughly balanced."
FOMC voters thought it was appropriate to wait for additional information in order to gauge the underlying momentum in the labor market and economic activity before taking another step in removing monetary accommodation. "Most participants anticipated that economic growth would move up to a rate somewhat above its longer-run trend during the second half of 2016 and that the labor market would strengthen further." We believe that Chair Yellen is willing to test the downside of the natural rate of unemployment in order to meet the Fed's maximum employment mandate.
July nonfarm payrolls rose by a robust 255K. The 3-month moving average of payroll gains moved up to 190K in July. We look for average monthly payroll gains to decelerate this year with the economy near full employment. The July unemployment rate was unchanged at 4.9%. Alternative labor slack measures were generally stable. The participation rate rose to 62.8%.
The FOMC maintained its current monetary policy settings today, in line with market expectations. Neither the 0.25% to 0.50% Fed funds target range nor the Fed's current portfolio reinvestment policies were changed. The assessment of current economic conditions in the policy statement was more upbeat, reflecting stronger job gains in June and an expected acceleration in Q2 real GDP growth to be reported on Friday.
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