The U.S. Federal Reserve today announced its widely anticipated third interest rate hike of 2018, shifting the central bank’s target range up by 0.25% to 2.00% – 2.25%, the highest rate posted in over a decade.
In a statement released this afternoon, the Fed focused on key economic data that guided its decision-making. It states that:
- The labour market has continued to strengthen as U.S. job gains have been strong on average and the unemployment rate has stayed low
- Economic activity has been rising at a strong rate
- Household spending and business fixed investment have grown strongly
- On a 12-month basis, overall inflation and inflation for items other than food and energy have both remained near 2.00%
It’s interesting to note that the Fed dropped language suggesting that policy remains accommodative in its statement.
Going forward, we expect to see one more interest rate increase this year (12 out of 16 Fed officials favour a fourth rate hike in 2018). “The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2.00% objective over the medium term,” they write.
Immediately following the announcement, the S&P 500 rose briefly before returning to pre-announcement levels and U.S. 10-year bond yields dipped slightly before bouncing back. The U.S. dollar also dropped slightly relative to the Canadian dollar and other currencies, before returning to pre-announcement levels early in the afternoon.
Overall, the Fed’s announcement is in line with our expectations and did not trigger changes in our strategy. To view the Fed’s full statement, please find it here.