Fed Full Steam Ahead

The US Federal Reserve (Fed) raised its benchmark short-term interest rate for the third time this year, which was no surprise to most market participants. Chris Molumphy, chief investment officer, Franklin Templeton Fixed Income Group, offers his take on the Fed’s “normalization” path in light of what he sees as an overall positive US economic backdrop.

The September US monetary policy meeting held few surprises as the Federal Reserve (Fed) continued its path of normalization, increasing its benchmark rate (the fed funds rate) 25 basis points for the third time this year, to a range of 2% to 2.25%. The Fed also updated its monetary policy and economic forecasts, which reflect a generally positive economic backdrop.

The most media attention seemed to focus on the Fed’s removal of the word “accommodative” in its official statement in regard to its stance on monetary policy. At the post-meeting press conference, Fed Chair Jerome Powell essentially said that language was no longer needed given the state of the economy and it does not signal any change in terms of the gradual tightening path the Fed has been on.

“Our economy is strong. Growth is running at a healthy clip. Unemployment is low. The number of people working is rising steadily. Inflation is low and stable,” he said, adding “It’s a particularly bright moment for the US economy.”

Looking at the Fed’s forecast and commentary, I wouldn’t read much into the removal of the “accommodative” language in the sense of any change in the trajectory of rate hikes the Fed has outlined going forward. It seems pretty clear they will continue to tighten.

The Fed’s actions and language reflect robust US economic fundamentals. US gross domestic product grew 4%+ (year-over-year) in the second quarter, and growth appears to have continued at a robust pace in the third quarter given employment data and other broad economic indicators.

Given this good fundamental backdrop, we think it’s healthy for the Fed to continue the gradual tightening path it has been laying out for some time now.