20180614-大华银行-Macro+Rates_Strategy__US_June_FOMC__Steeper_Rate_Path_With_4th_Hike_Pencilled_In_For_2018_6页_497kb

Summary of the June 2018 FOMC Meeting

Core Content

The June 12–13, 2018 FOMC meeting marked a significant shift in the Federal Reserve's monetary policy stance, with a more hawkish outlook compared to previous meetings. The decision to raise the Fed Funds Target Rate (FFTR) by 25 basis points to the $1.75 - 2.00%$ range was widely anticipated and unanimously approved. Additionally, the Fed announced an increase in its balance sheet reduction (BSR) program to $40bn in July 2018, as previously scheduled.

Main Points

1. Rate Hike Expectations

• The June dot-plot chart showed a revised median forecast for the FFTR in 2018 at $2.4%$, indicating 4 rate hikes in 2018 (up from 3 previously).
• The 2019 median forecast was increased to $3.1%$, implying 3 hikes in 2019.
• The Fed is expected to hike once more in 2020, with the median forecast at $3.4%$.
• The long-run FFTR forecast was kept at $2.9%$.

2. Economic Outlook

• The Fed upgraded its 2018 GDP growth forecast to a median of $2.8%$ (from $2.7%$).
• Unemployment rate is projected to fall further below the long-run rate of $4.5%$, reaching $3.6%$ in 2018 and $3.5%$ in 2019–2020.
• Inflation is expected to slightly exceed the $2%$ target, reaching $2.1%$ in 2018 and 2019, with core PCE inflation expected to hit $2%$ earlier in 2018.

3. Policy Communication Changes

• Interest on Excess Reserves (IOER) was increased by 20bps to $1.95%$, just 5bps below the upper end of the FFTR range.
• Forward guidance was removed, as the Fed believes the economy is strong enough to justify this change.
• Starting in January 2019, the Fed will hold a press conference after every FOMC meeting, making each meeting "live" in terms of communication impact.

4. Balance Sheet Reduction (BSR)

• The BSR program will continue as scheduled, with total annual cuts increasing from $30bn in 4Q 2017 to $420bn in 2018, and reaching a steady state of $600bn in 2019.
• The Fed aims to reduce its balance sheet to about $3 trillion by mid-2020, slightly ahead of the previous estimate of $2.5 trillion by mid-2021.

5. Market Reactions

• Market-based instruments and analysts had already priced in the scenario of a fourth rate hike in 2018, so the repricing impact is expected to be mild.
• The asymmetric bias in market expectations favors a steeper tightening trajectory, especially for rate hike probabilities beyond 2019.

6. Additional Insights

• Chairman Powell emphasized the Fed's commitment to the $2%$ inflation target and noted that trade policy concerns are rising, though they have not yet impacted economic data.
• The Fed believes that as interest rates approach the neutral level, the language of "accommodative" policy will no longer be appropriate.
• Wage and inflation growth remain a puzzle for the Fed, as they do not see a strong link between falling unemployment and rising inflation in their models.

Key Information

• FFTR range after June hike: $1.75 - 2.00%$
• Expected FFTR by end-2018: $2.25 - 2.50%$
• Expected FFTR by end-2019: $3.1%$
• Expected FFTR by end-2020: $3.4%$
• Long-run FFTR forecast: $2.9%$
• IOER rate: $1.95%$
• BSR program increase: from $30bn in 4Q 2017 to $420bn in 2018
• Balance sheet target: $3 trillion by mid-2020
• Market expectations:
  • 16.5% chance of an August 2018 hike
  • 82.9% chance of a September 2018 hike

Conclusion

The June 2018 FOMC meeting confirmed a steeper rate hiking cycle for 2018, with the Fed now expected to hike four times that year. The removal of forward guidance and the introduction of regular press conferences signal a more transparent and data-driven approach. The BSR program remains a key tool for tightening policy, and the Fed is showing increasing confidence in the economy's resilience. While the Fed maintains a cautious stance on inflation and wage growth, the overall direction of monetary policy is becoming more aggressive, with a clear path to higher rates in the coming years.