Fed meeting: everything stays the same

The first interest rate hike of 2017 has taken place. Yesterday evening the US central bank raised the rate corridor for the third time in the past one and a half years by 25 basis points and held out the prospect of further moderate interest-rate increases. With three assumed key rate hikes a year the general tenor of the US central bank has shifted in the past few months towards a marginally tighter monetary policy. The Fed would now appear to be on the right tack as the monetary watchdogs did not change their present monetary-policy course.

With respect to the projections the most interesting were the expectations of the members of the FOMC regarding the key rate path. Compared to the Fed economists’ assessments in December 2016, the so-called “dot plot” shows an unchanged upside interest rate path for the next few years. The Fed officials expect a median key rate of 1.4% as at the end of 2017. At the end of 2018 they project a key rate of 2.1% and in December 2019 of 2.90%. At the press conference Yellen also tried to emphasize the continuity in monetary policy.

Overall, equity markets closed slightly higher after the US monetary watchdogs’ decision. The yield on ten-year US Treasuries initially reacted by falling six basis points while the US dollar chalked up losses. The market reaction was undoubtedly triggered by the fact that many market players had expected a further tightening of the monetary policy course.

The latest meeting of the FOMC essentially confirmed our assessment. We see no reason to change our current forecast of two further key rate hikes this year. These are likely to come in June and then again in December. At the end of 2017 the upper limit for the Fed funds rate will probably be 1.50%. We do not expect any rate move in September. The Fed could announce the details of a change to its reinvestment policy. This would no doubt have just as restrictive an effect.

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