On Wednesday, December 13 at 22:00 MSK, the U.S. Federal Reserve concluded its latest meeting, during which the federal funds rate was increased from less than 1.25% to less than 1.50%. The vote was 7 to 2.
The regulator made a decision in line with the Forex market forecast, but significantly revised several economic forecasts for the U.S. and increased the sales volume under the tapering of quantitative easing from $10 billion to $20 billion.
Forecasts by the Federal Reserve on the U.S. Economy
- 2017: 1.4% (unchanged);
- 2018: 2.1% (unchanged);
- 2019: 2.7% (unchanged);
- 2020: 3.1% (up from 2.9% in September)
- Long-term: 2.8% (unchanged).
- For 2017: 2.5% (up from 2.4% in September);
- For 2018: 2.5% (up from 2.1% in September);
- For 2019: 2.1% (up from 2.0% in September);
- For 2020: 2.0% (up from 1.8% in September);
- Long-term: 1.8% (unchanged).
- For 2017: 1.7% (up from 1.6% in September);
- For 2018: 1.9% (unchanged);
- For 2019: 2.0% (unchanged);
- For 2020: 2.0% (unchanged);
- Long-term: 2.0% (unchanged).
- For 2017: 1.5% (unchanged);
- For 2018: 1.9% (unchanged);
- For 2019: 2.0% (unchanged);
- For 2020: 2.0% (unchanged).
- For 2017: 4.1% (down from 4.3% in September);
- For 2018: 3.9% (down from 4.1% in September);
- For 2019: 3.9% (down from 4.1% in September);
- For 2020: 4.0% (down from 4.2% in September);
- Long-term: 4.6% (unchanged).
The regulator noted strong growth in economic activity, moderate household spending growth, strengthening capital investment, improved labor market conditions, and inflation below the target of 2%. Inflation expectations are low. Hurricanes did not cause significant damage to the economy.
In the future, the labor market will maintain its strong trends for several years, and inflation will remain below 2% in the short term.
Press Conference by Janet Yellen
Janet Yellen, the head of the Federal Reserve, stated that economic activity in the U.S. will continue to grow at a moderate pace. The Trump tax reform could provide strength to the upward trend, but macroeconomic prospects remain unclear.
According to Yellen, inflation has decreased due to temporary factors, but not all reasons are well understood. Wages are growing at a moderate pace due to slow productivity growth. However, the inflation target will not be changed.
The interest rate will rise at a moderate pace, and the dot plot already includes FOMC members’ expectations regarding economic stimulus from tax changes.
However, the revision of September forecasts is only partially related to tax changes, said the Fed chair.
Yellen does not see signs of increasing financial instability in markets due to rising prices of U.S. assets. Stock market valuations are not among the main risks for the Fed.
The regulator is concerned about the growing U.S. debt, which will increase further due to the tax reform.
If necessary, the regulator is ready to lower interest rates, especially if inflation stops rising, said the Fed chair.
Reaction of the U.S. Dollar Exchange Rate
The EUR/USD pair reacted to the Fed meeting results with an increase, overcoming strong resistance around 1.18. The decline in the dollar‘s value was influenced by differences of opinion within the FOMC (7 out of 9 voted for the rate hike) as well as moderate forecasts for the pace of interest rate increases in 2018.
It was stated that there would be three rate hikes, but at the same time, numerous dovish comments were provided, especially regarding the possibility of lowering rates if needed, according to experts from ForTraders.org.
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FAQ
Why did the dollar weaken after the Fed’s rate hike?
The dollar weakened due to differences of opinion within the FOMC and moderate forecasts for future rate increases.
What were the key economic forecasts from the Fed?
The Fed revised its forecasts for GDP growth, inflation, and unemployment, showing improved economic conditions.
Will the Fed lower interest rates in the future?
The Fed is prepared to lower rates if inflation stops rising, according to the Fed chair.
