Invesco Canada blog

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Brian Schneider | June 14, 2018

Federal Reserve hikes with upbeat outlook

The U.S. Federal Open Market committee (Fed) continued their recent gradual hiking cycle by increasing the federal funds rate by 0.25 percentage points at today’s meeting. The target range after the hike is now 1.75%-2.00%. The financial markets had been fully expecting today’s move.

In their statement, the Fed recognized strong employment growth, a declining unemployment rate, increasing business investment and improving household spending as reasons for the increase.

The Fed so-called “dot plot” or interest rate projections showed the median dot projecting two more rate hikes in 2018. This change was the result of one Fed member (on average) increasing their rate hike forecast this year.

The Summary of Economic Projections (SEP) showed a slightly higher GDP projection in 2018 (2.8% from 2.7%), a lower unemployment rate (3.6% instead of 3.8% in 2018) and slightly higher core Personal Consumption Expenditures (PCE) inflation in 2018 (2.0% versus 1.9%).

The tone of the press conference was a little more dovish than the statement or the SEP. Fed Chair Jay Powell continued to emphasize they were gradually moving rates higher as the economy continues to perform well. He also announced the Fed will have press conferences after every Fed meeting starting in January. He cautioned that the change was made to increase communication and not an indication that the Fed would be adjusting policy any faster.

At Invesco Fixed Income, we believe today’s rate hike is getting close to a level where the Fed should pause before hiking again. With the Fed potentially hiking rates another two times this year, the outlook for equities should be more cautious, while the outlook for fixed income remains positive.

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The federal funds rate is the rate at which banks lend balances to each other overnight.

The Federal Reserve’s “dot plot” is a chart that the central bank uses to illustrate its outlook for the path of interest rates.

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