What Economists Say About the Fed's June Rate Decision

By Kate Davidson Features Dow Jones Newswires

The Federal Reserve raised its benchmark federal funds rate to a range between 1.00% and 1.25% on Wednesday and announced a framework for reducing its $4.5 trillion portfolio of holdings sometime this year.

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Officials also released new quarterly economic projections, and Chairwoman Janet Yellen held a press conference. Here are some reactions from economists:

Although we continue to expect another hike this September with balance sheet runoff being announced in December, there are risks to that call. First, the statement acknowledged the weak inflation, but the Committee seems to be looking through it. Ongoing soft inflation could delay another step to normalization. Second, the lean in the paragraph about the balance sheet increases somewhat the likelihood that the Committee runs off its balance sheet in September, rather than December, but for now, we are retaining our call of a December runoff.

-- Seth Carpenter, Samuel Coffin and Robert Sockin, UBS

Fitch believes the Fed is increasingly comfortable with its normalization process and less data-dependent following recent inflation readings that have been slightly lower than consensus expectations (although they remain close to target). The interest rate hike showed the Fed was prepared to look through weak first quarter consumption and GDP and underlines Fed concerns about unemployment falling too far below its equilibrium rate.

-- Brian Coulton, Mark Brown, Fitch Ratings

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The unemployment rate has dropped by half a point in the past four months, but the Fed now expects, comically, no further decline across the rest of the year. This makes no sense at all and likely will have to be revised in September, by which point it might be just 4.0%, well below the Fed's 4.6% Nairu [non-accelerating inflation rate of unemployment] estimate, down 0.1pp from March. That's just not consistent with the market's view that the Fed will hike only once more in this cycle. One side has to blink, and given the Fed's 50-year obsession with the unemployment rate, it's unlikely to be Dr. Yellen.

-- Ian Shepherdson, Pantheon Macroeconomics

The FOMC statement was about as expected. The committee raised the fed funds rate by a quarter of a percentage point, and announced some information on reducing the size of its balance sheet. The near-term expected path for the fed funds rate looks similar to the previous path. The FOMC, rightfully so, expressed a little more uncertainty that inflation would return to the 2 percent target, but that is still the most likely outcome given an unemployment rate in May of 4.3 percent.

-- Gus Faucher and Stuart Hoffman, PNC

The Fed seems comfortable with the economic outlook, although recent inflation developments have unnerved it and further unexpected softness could see a modestly more cautious approach to tightening. However, for now the FOMC appears to remain convinced that in the light of a tight labour market the "appropriate management of risks" includes "gradual" withdrawal of policy accommodation.

-- David Page, AXA IM

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

June 14, 2017 18:05 ET (22:05 GMT)