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Fed hikes rates as expected

Home / Press Centre / Hermes: Fed hikes rates as expected

Silvia Dall’Angelo, Senior Economist
14 June 2018
Corporate News

“At the end of its two-day meeting, the Fed raised its policy rates by 25bps to a range of 1.75-2.00%, as fully expected by financial markets. This marks another step along a gradual normalisation process that is now well underway: the central bank has raised interest rates seven times since December 2015, while it began reducing its bloated balance sheet in October 2017.”

“The general tone of the meeting was upbeat, reflecting recent positive news on the US economy. The statement sounded more confident about the outlook, and economic forecasts were upgraded slightly. In addition, the Fed’s projections for the policy rate (the so-called dot plot) showed a slightly faster pace of tightening this year (four hikes in total according to the median dot), but little change in following years. The terminal rate is still expected to be 3.4% in 2020, implying monetary policy would be somewhat restrictive at that stage. That said, the Fed’s overall strategy was unchanged and the Fed confirmed its gradual approach to monetary policy normalisation.

“As pointed out in our latest Ahead of the Curve, uncertainties about the Fed’s estimate of equilibrium rates (the so-called r*) and future economic developments mean that the Fed’s projections for the policy rate should be taken with a pinch of salt, notably towards the end of the forecasting horizon. Several potential challenges and risks could impact the Fed’s course of action, including significant fiscal stimulus, the evolution of the US yield curve, a potential overshoot of inflation and, most importantly, the possible escalation of protectionist threats.

“On balance, we believe normalisation is likely to turn out to be slower rather than faster. As QT builds, it may become clearer the Fed needn’t hike as far as the current dot-plot suggests - especially if inflation stays tame, the dollar lifts, and/or, linked to that, protectionism starts to hurt. All of which, of course, would support our long-held ‘new normal’ view of low-for-longer global rates and yields, rather than an imminent ‘normalisation’ to pre-crisis levels.”

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Silvia Dall’Angelo Senior Economist

Silvia joined Hermes in October 2017. As an experienced global economist, she is responsible for providing macroeconomic analysis and commentary, non-standard macroeconomic modelling, and developing relationships with key central banks and monetary authorities. Silvia previously spent 10 years at Prologue Capital Ltd, latterly as a global economist responsible for the team’s macroeconomic view. She holds a Master of Science in Economic and Social Sciences, as well as a Bachelor in Economic and Social Sciences, from Bocconi University in Italy.

Read all articles by Silvia Dall’Angelo

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