Fed Raises Real GDP Growth Projection for 2018, and Interest Rates

The Federal Reserve raised its real gross domestic product (GDP) annual growth projection for 2018 to 3.1%, up from 2.8%. The Board of Governors also voted unanimously to raise interest rates paid on required and excess reserve balances to 2.20%, effective September 27, 2018.

The Federal Open Market Committee (FOMC) said inflation on a 12-month basis — including for items other than food and energy — remain near 2%. Coupled with strong labor market conditions and increased GDP growth, the risks to the economic outlook appear balanced.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent,” the FOMC said in the statement.

“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 labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

Requests for the rate submitted were made by the Boards of Directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco:

Effective September 27, 2018, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2 to 2-1/4 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during September that exceeds $24 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during September that exceeds $16 billion. Effective in October, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.

The Atlanta Fed’s GDPNow model revised its third-quarter 2018 gross domestic product (GDP) forecast to 4.4% on September 14. That’s up from 3.8% on September 11. The revision reflects stronger personal consumption expenditures, also known as consumer spending, and industrial production.

It does not factor in the very strong build in business inventories that also came out Friday. While the advance estimate of U.S. retails sales for the month of August was slightly weaker than expected, upward revisions to an already-strong July was a big score.

The Conference Board’s Consumer Confidence Index hit a new 18-year high this quarter and threatened to break the all-time record. The Survey of Consumers, a closely-watched gauge of consumer sentiment, is at the highest level since 2004.

U.S. GDP 2018 Picture

The GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis (BEA).

The Federal Reserve real GDP growth projections are typically low juxtaposed to both BEA and the GDPNow forecasting model.

BEA revised Q1 2018 GDP higher to +2.2%. First quarters post-Great Recession under the previous administration generally were negative.

The Q1 2018 strength pushed the annualized GDP rate for +3.1% from the trailing 4 quarters after Q2 2018 was released. That’s reinforced by growth consistently above +2% in every quarter for the first time in more than 10 years.

GDP for Q2 2018 was revised slightly higher at the end of last month to 4.2%, beating the consensus. The third and final reading for the Q2 2018 will be released on September 27.

The advance estimate for Q3 2018, which gets us back to the GDPNow forecasting model, will be released on October 26 at 8:30 AP EST.