Following the Fed’s announcement, please see below for market views from the Global Fixed Income, Currency & Commodities Team (GFICC):
Consistent with our and the market’s expectations, the Federal Open Market Committee (FOMC) increased the Fed Funds rate to a range of 1.25%‐1.50%. At this meeting, Fed members also updated their Summary of Economic Projections and Chair Yellen also hosted her quarterly press conference.
The December statement indicated that the US economy has largely put the detrimental impact from recent hurricane disruptions behind it. The Committee continues to acknowledge that its preferred measure of inflation is running below its target. The FOMC continues to characterize the path of future rate hikes as gradual. The Fed completely removed any reference to the balance sheet from the statement to stress the “behind the scenes” perception of this action. Starting in January, the maximum run-off will rise from $10bln to $20bln.
We can break the statement into three parts:
President Kashkari of the Minneapolis Fed and President Charles Evans of the Chicago Fed dissented. This is the first time in 15 years where two members dissented in favor of an easier policy stance. Neither will be voting members in 2018.
Summary of Economic Projections
Within the projections, the growth forecasts were upgraded for 2017 through 2020. The inflation forecasts were unchanged. The unemployment rate estimates were cut for the next few years, as the unemployment rate continues to fall faster than the Committee has anticipated. The long-run unemployment rate was unchanged.
The median dots were unchanged in all years, except 2020 which saw a modest increase. The Chair mentioned changes to the Dots were not a reflection of more stimulative fiscal policy into their forecasts, but rather confidence in their future outlook. One complicating factor going forward will be the changing composition of the Committee. Governor Quarles submitted for the first time while Chair Yellen is submitting for her last time. There remain four open spots on the Board of Governors.
Chair’s Press conference
At Chair Yellen’s final press conference, she remained optimistic in light of recent labor market and growth developments. The Chair continued to communicate confidence that tighter labor markets would lead to higher wage and price inflation in the future on a lagged basis. The Chair continues to believe the recent slowdown in inflation remains transitory.