The FOMC will also update its quarterly Summary of Economic Projections (SEP) and the dot plot. Economic data were generally better than expected. Updated forecasts are likely to show a stronger growth, a lower unemployment rate and perhaps a somewhat higher inflation rate.
We expect the 2018 median dot to increase to four hikes this year, up from three at the previous meeting. We acknowledge that there is some risk that the 2019 median dot could also rise by a quarter of point, but this one is a close call.
As a technical adjustment, the FED should raise the IOER (interest rate on excess reserve) rate by 20bp even as it increases the target range for the Fed funds rate by 25bp. This adjustment was largely discussed in the May FOMC minutes. The market impact should be limited.
The press conference should confirm a gradual step towards normalizing monetary policy. Chair J Powell should repeat that the Fed will tolerate some modest overshooting of the 2% inflation target.
Market impact should remain muted as this hike is already fully priced. We expect a hawkish reaction if 2018 and 2019 dots increase.