FOMC: Continued Rates Hikes and Adjusted Economic Forecast

​Last Wednesday, the Federal Open Market Committee (FOMC) held their second bi-monthly (once every two months) meeting, and the first meeting under the Fed's new Chairman, Jerome Powell. Wednesday's meeting resulted in an increase of 25 basis points (0.25%), moving the benchmark short-term interest range to 1.50%-1.75%, and the Fed hinted at the potential of at least two more rate hikes during the six remaining FOMC meetings. The recent increase leaves the Fed funds rate around 1.63%, which is at its highest level since September 2008. The 2018 GDP growth forecast was increased to 2.7% from its previous 2.5%. Many of the board members kept their 2018 projections for short-term inflation around 1.9% and longer-term inflation slightly above 2.0%. Additionally, it has been speculated that the Fed might be looking to shrink its nearly $4.5-trillion balance sheet. The FOMC's meeting notes go into detail concerning reasoning for rate hikes, specifically positive economic growth, low unemployment, and job gains during the recent months. 

The FOMC meets eight times a year for the purpose of determining near-term monetary policy for the United States. Concerning monetary policy, the FOMC evaluates the relative concerns over economic outlook, specifically economic growth and pending inflation. After evaluation, FOMC members will vote on the appropriate policy decision. Policies, for example, could include: quantitative easing (QE), which was implemented by the Fed from 2008-2014, whereby the Fed cuts short-term interest rates or purchases of debt securities in the open market to add stimulus, or quantitative tightening, where interest rates - specifically the federal funds rate's (i.e., the inter-bank overnight funds lending rate) effect on all other consumer rates - are raised and open-market purchases made by the Fed are cut back. Recently, the Fed has begun implementing a policy more related to quantitative tightening since it began pulling back its aggressive QE measures in late 2014.
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As alluded, the main outcome of each FOMC meeting revolves around interest rates, which, in turn, will affect the economy. Higher interest rates tend to slow economic activity; lower interest rates tend to stimulate economic activity. Either way, interest rates have an influence on the sales environment. For example, fewer homes or cars will be purchased when interest rates are relatively higher. Furthermore, interest expense is a significant factor for many American businesses, particularly for those companies with higher-than-average debt loads or working capital requirements. Therefore, the interest cost has a direct impact on firms’ profitability and effective purchasing power.