Fed Projects Fewer Hikes Next Year but Statement isn’t Entirely Dovish

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Having raised its benchmark rate a quarter-point to 2.25-2.5% as widely expected on Wednesday, the Fed lowers its projections for future hikes.

The move marked the fourth increase this year and the ninth since the rate normalization process began in late 2015.

The central bank now projects only two hikes next year instead of three, while the benchmark rate would be near 2.9% by then versus the previous projection of 3.1%.

However, the language in the post-meeting statement wasn't entirely dovish.

"The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term," the statement said.

The Fed added that it will "continue to monitor global economic and financial developments and assess their implications for the economic outlook".

“There are some other very subtle changes here and there, but all clearly gave the impression the Fed is looking to slow the pace of rate hikes from the four seen in 2018,” James Knightley, chief international economist at ING pointed out.

In addition, the Federal Open Market Committee expects one rate hike in 2020, anticipating the federal funds rate to be about 3.1% by the end of that year.

ING—previously forecasting three rate hikes in 2019—said now it see the risks increasingly being skewed towards merely two hikes.

There’s a lot of economic and market uncertainty, particularly relating to trade,” said Knightley. “We also have to remember that the Fed is shrinking its balance sheet while there is growing talk – most notably from Lael Brainard – concerning raising the countercyclical buffers. This could be used as a way of shoring up financial risks while also tightening monetary conditions.”

Bank of America Merrill Lynch said it projects no rate hike in 2020.

While the market is worried that the US might experience a recession within two years, the Fed’s statement showed little concern by continuing to describe economic growth as rising at a strong rate.

GDP is now seen as rising 3% for the full year of 2018, down one-tenth of a percentage point from September, and 2.3% for 2019, a 0.2 percent point reduction. However, officials took up their long-run estimates, to 1.9% from 1.8% in September.