Fed Softens Stance Slightly

The Federal Reserve anticipated a more gradual tightening path going forward. This weighed on the dollar and lifted equities. August Fed funds futures implies less of a chance of a hike next month. It is now consistent with an 8% chance of a hike, which is less than half the probability assigned at the end of last week.The immediate reaction was driven by the Fed’s dot plots.  Although the median continues to expect two hikes this year, six officials now see only one hike.  Only one official anticipated one hike this year in the last forecasts made in March. The median also expects three hikes in 2017 and 2018.  Previously four hikes were anticipated in both years. The Fed has also shaved its long-run equilibrium level to 3.0% from 3.25%.

The FOMC statement recognized that the labor market improvement has slowed, but that growth has accelerated. Yet it shaved this year’s growth forecast to 2.0% from 2.2%.  It trimmed next year’s forecast to 2.1%. The unemployment forecasts were left unchanged for this year and next at 4.7% and 4.6% respectively.


The new forecasts also tweak this year’s PCE projection slightly higher to 1.4% from 1.2%. It left the years unchanged at 1.9%  and 2.0% for 2017 and 2018 respectively. The core rate projection was lifted to 1.7% from 1.6% this year. It was lifted to 1.9% from 1.8%  for next year.