Powell Era at Fed Kicks Off with Rate Hikes, Optimism

March 21, 2018

Keywords: Market News, Yield, Fixed Income, Bond Yields, Interest Rate Risk, Economic News

The Federal Reserve Board raised its benchmark interest rate from 1.5 percent to 1.75 percent on Wednesday while also bolstering its outlook for U.S. growth for the remainder of this year and 2019.

The expected rate hike came at the Fed’s first meeting under Chairman Jerome Powell, who took over for Janet Yellen in February. The central bank also signaled that it doesn’t believe the economy is overheating in such a way that would rapidly drive up inflation, and said that it plans to stay on its current path of gradual rate increases.

“The economic outlook has strengthened in recent months,” Powell said at a post-meeting news conference.

Here’s a look at some of highlights from the meeting and how it could affect the economic outlook over the next few years.

Positive Outlook

The central bank raised its median estimate for economic growth for this year to 2.7 percent, an increase from the 2.5 percent projection in December. Fed officials also boosted their 2019 growth estimate to 2.4 percent, up from 2.1 percent in December. Unemployment is now projected to drop to 3.8 percent this year and 3.6 percent next year, slightly lower than previous projections.

The Fed cited a more stimulative fiscal policy, ongoing job gains that are boosting incomes and confidence, and a firm foreign growth trajectory as factors driving the positive outlook.

“Although the growth rates of household spending and business investment appear to have moderated early this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid,” Powell said.

More Rate Hikes Coming

Fed officials said their median inflation projection is 1.9 percent this year, 2 percent next year, and 2.1 percent in 2020, essentially the same as their December estimates. They also indicated they expect to raise interest rates a total of three times in 2018, which Powell said was the result of the Fed “trying to take the middle ground” in its approach to balancing inflation and economic growth.

“In making our policy decisions over the next few years, we will continue to aim for inflation of 2 percent while sustaining the economic expansion and a strong labor market,” he said. “In the committee’s view, further gradual increases in the federal funds rate will best promote these goals.”

Powell said raising rates too slowly would increase the risk that monetary policy could need to tighten abruptly down the road, which he said could jeopardize the economic expansion. But he said the Fed wants to avoid inflation running persistently below its target of 2 percent because it would allow for less leverage to counter an economic downturn.

The Powell Era Starts with Praise

Reviews of Powell’s performance were generally positive, with several observers noting that the post-meeting news conference was considerably shorter than those of his predecessor. Analysts such as Ellen Zentner, chief economist at Morgan Stanley, had already said she expected Powell to strike a less formal tone in his communications.

"While previous Chairs Yellen and Bernanke focused on being highly prepared for every press conference... Chair Powell has already shown in testimony he may be more willing to speak off the cuff, taking a more casual approach," Zentner wrote in a note to clients, as reported by CNBC.

It also appears the new Fed chairman is kicking off his leadership tenure with a hawkish tone than originally expected.  Powell suggested there could be more substantive changes on the horizon as well, saying he’s strongly considering holding additional policy-meeting news conferences, rather than following the current schedule of four per year.

“My colleagues and I are committed to communicating as clearly as possible,” Powell said. “I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy.”

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