Invesco Canada blog

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Brian Schneider | September 27, 2018

Fed continues gradual hikes

The U.S. Federal Open Market committee (Fed) hiked the federal funds rate by a quarter percentage point at Wednesdays meeting. This is the third rate hike this year, putting the new target range at 2.00%-2.25%. The market had fully priced in today’s move well ahead of the meeting.

The Fed’s statement, released after the meeting, indicated economic growth is anticipated to remain strong, buoyed by gains in employment, continued increases in business investment and growing household spending.

The Summary of Economic Projections, which reflects the economic expectations of the committee members, showed expected improvement in gross dometic product (GDP) growth in 2018 and 2019, but no change to their long run GDP projections of 1.8%. Their December Fed Funds projections indicate another hike should be expected in December.

The only significant change to the statement from June was the elimination of a sentence that had previously referred to monetary policy as remaining accommodative. At the press conference, Fed Chair Jay Powell indicated that removing the word accommodative from the statement did not change the path of policy. He also reinforced current Fed policy of hiking rates gradually in order to keep inflation near the Fed’s target of 2%.

Invesco Fixed Income† believes the current approach of hiking rates slowly is appropriate and that the Fed’s gradual approach should be positive for U.S. fixed income.

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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.