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US Fed Hikes Rates, Sounds Less Hawkish Than Feared

The US Federal Reserve raised the policy rate by 25 basis points in mid-March, but left its outlook largely unchanged. We continue to expect two more rate hikes in 2017.

After hawkish comments from Federal Reserve (Fed) officials in recent weeks, the 25 basis point hike in the target range for the federal funds rate that the Fed announced on 15 March ended up being a foregone conclusion. Therefore, the focus was more on whether policymakers would make any significant changes to their policy statement or own projections. Much to the relief of markets, there was no remarkable shift in the policy stance. Apart from some minor tweaks to the policy statement, the Fed’s broad economic outlook was left largely unchanged.

Three hikes per year 

The same holds true for the economic projections: inflation, GDP and unemployment rate forecasts were similar to the ones made in December 2016. Furthermore, the Fed still expects a total of three 25 basis point rate hikes in each 2017, 2018 and 2019, bringing the federal funds rate up to the (unchanged) long-run rate of 3.0 percent by year-end 2019.

No change in economic outlook 

In her press conference, Fed Chair Janet Yellen underlined this message of continuity, stating that the Fed had not changed its economic outlook. Further down the line, the Fed will likely adjust its balance sheet policy of reinvesting maturing bonds in its portfolio. Although that issue was discussed at the March meeting, no decisions have been taken so far. Overall, based on our view that the US economy is likely to grow slightly above potential, the labor market is going to improve further and core inflation is gradually moving higher, we expect the Fed to deliver two more 25 bp rate hikes this year.