Yesterday, the Fed released its most recent monetary policy statement. How can it affect the financial markets?

In line with expectations, the Fed raised the federal funds rate target by 25 base points to the 1.25-1.50 percent range. This way, the U.S. central bank delivered the third hike this year, and the fifth rate increase in the post-crisis period. The most important paragraph of the released monetary policy statement is, thus, as follows:

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 1-1/4 to 1 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

However, there were also other changes in the statement. First, the FOMC altered the statement language about the labor market outlook, as it replaced the view that “labor market conditions will strengthen somewhat further” with the opinion that “labor market conditions will remain strong”. It suggests that the Fed expects the pace of job gains to moderate over time. Second, the U.S. central bank dropped the mention of the unwind of its balance sheet. Third, Charles Evans and Neel Kashkari dissented, as they preferred to maintain the federal funds rate unchanged. As a reminder, they will exit the voting group of the FOMC next year, so the committee will turn more hawkish in 2018.

To not disrupt the structure of interest rates, the U.S. central bank also lifted its other interest rates by 25 basis points. In particular, as we can read in an implementation note, the Fed raised interest paid on required and excess reserve balances to 1.50 percent, the overnight reverse repo rate to 1.25 percent and the discount rate to 2.00 percent. The decision to raise interest rates was widely anticipated, so it should not alter the markets significantly.