Consistent with our and the market’s expectations, the Federal Open Market Committee (the FOMC) increased the Fed Funds rate by 25 basis points, at 0.50%‐0.75%. In addition to the rate increase and the typical FOMC Statement, Fed members updated their Summary of Economic Projections.
The tone of the December Statement was consistent with a rate increase but still struck an optimistic, yet cautious outlook for the future.
Once again, the Summary of Economic Projections added some fireworks to a well telegraphed rate hike. The growth and inflation outlooks were only modestly altered, mostly reflecting a mark‐to‐market in 2016. The famous Dot Plot provided the biggest surprise with a more hawkish tilt than had been expected. The Committee continued to stress gradualism toward tightening of the Fed Funds Rate.
We can break the Committee’s statement into three parts:
There were no dissenters at the meeting. All FOMC participants and the market felt a rate hike was appropriate.
The Summary of Economic Projections showed marginal changes on the economic front, principally reflecting a mark‐to‐market of 2016. The FOMC did upgrade their expectations for GDP and unemployment in 2017 by 0.1. All other economic forecasts were unchanged. The median Dots rose 25 bps in 2017, moving the forward projection up by the same amount (the annual pace in ’18 & ’19 was unchanged). There was greater dispersion amongst participants as to the appropriate pace and level of the Fed Funds rate going forward. The median projections over the next three years were not an anomaly and suggest the broader Committee is a bit more confident heading into 2017. The median long‐run Fed Funds rate moved up slightly to 3%, but this was a reflection of one voter moving the median higher, rather than a broader based adjustment by the Committee.
At the press conference, Chair Yellen remained optimistic in light of recent labor market, inflation and growth developments. However, she emphasized the gradualist approach the FOMC is currently adhering to and the heightened level of uncertainty surrounding future growth paths in the U.S. The Chair downplayed the changes in the Dots as minor adjustments with a large uncertainty band and noted that some members incorporated estimates of the potential fiscal easing into their assumptions. The Chair did dispel the notion that the committee would allow the economy to significantly overheat. Otherwise, a large portion of the Chairs time was dedicated toward answering questions on the FOMC’s relationship and interaction with the incoming administration and how some of the policies would impact decisions. The Chair effectively pivoted on many of these questions.