Why the FOMC Surprised Markets with a Hawkish Statement
FOMC hiked rates by 0.25%
On June 14, the Federal Open Market Committee (or FOMC) raised the federal funds rate by 0.25% to 1.00–1.25%, as expected by the markets. The surprise, however, was the FOMC’s announcement regarding its plans to unwind the Fed balance sheet later in 2017 if the economy performs according to its members’ expectations.
The projections for future rate hikes also remained unchanged, with the dot plot suggesting another rate hike in 2017.
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FOMC members remain optimistic
The statement that followed the FOMC meeting states that the members felt the US economy continued to expand moderately, and they acknowledged the moderate job growth in the previous quarter. The FOMC members indicated that household spending has picked up and that investment in business has increased.
What surprised the markets was the hawkish tone of the Federal Reserve’s chairperson, Janet Yellen, despite the recent decline in inflation (TIP) and the recent shortfall in retail sales. This could be an indication that the FOMC remains optimistic about the US economy and believed it was better to act sooner rather than later. In our view, the Fed could continue its path toward normalization.