Instant Analysis: FOMC statement and projections for December

Scott Anderson
Posted by Scott Anderson
Chief Economist

It’s unanimous – U.S. interest rates are moving higher.

Closeup of intricate window designs on the Federal Reserve building.In a unanimous decision the Federal Open Market Committee (FOMC) decided to raise the target range of the fed funds rate by a quarter percentage point today to between 0.50 and 0.75%, from 0.25 and 0.50%.  This is in line with our and the market’s consensus expectations.

The big news came from the revised Fed dot-plot rate projection for 2017.  The median forecast from FOMC participants is now for 3 quarter-point rate hikes next year, up from a median of 2 quarter-point rate hikes projected back in September. The year-end 2017 median fed funds rate forecast from the FOMC is 1.4%.   All FOMC participants now see at least one additional rate hike next year.  It’s important to note some of the FOMC dots did migrate lower for 2017, and the top-end of the forecast range did not change. So we see this as only a modest upward adjustment in the FOMC rate hike expectations for next year.  Yellen seemed to downplay the changes in the dot-plot, calling them “very tiny or very modest.”

Forecasts for 2018 and 2019

The median FOMC forecast is for three additional quarter-point rate hikes in 2018 and 2019, unchanged from the FOMC’s view in September.  But with the additional hike in 2017, the year-end median fed funds target rate projections for 2018 and 2019 move up to 2.1 and 2.9 respectively.  The long-run fed funds rate also moved up by a tenth from September to 3.0%, meaning the Fed expects to have nearly fully normalized, short-term interest rates by the end of 2019.

Treasury bonds and notes are selling off on the announcement, with the 2-year Treasury yield rising by 10.0 basis points, and the 10-year Treasury yield up 6.6 basis points to 2.54%. The U.S. dollar spot index is up about 0.90%.  Oil (-4.0%) and gold prices (-1.32%) are dropping, and the S&P 500 index is down 0.9% from yesterday.

As we expected, the FOMC median growth and inflation outlook was little changed from the September projections.  The FOMC median forecast for GDP growth for 2016 and 2017 was revised up by a tenth of a percentage point to 1.9% and 2.1%, respectively. There was no change to the growth outlook for 2018 and 2019, at 2.0% and 1.9%.  PCE inflation was revised 0.2% higher for 2016 to 1.5% from 1.3%.  PCE inflation is expected to gradually lift in 2017 and 2018 to 1.9% and 2.0%, unchanged from the FOMC September projections. Yellen noted in her press conference that inflation is closer to the Fed’s 2.0% objective.

Stability on the employment front

Yellen mentioned in her press conference that some participants included changes in fiscal policy in their forecasts. But she also noted, “Fiscal boost not obviously needed for full employment.”

The unemployment rate for 2016 and 2017 was revised lower by a tenth of a percentage point to 4.7% and 4.5%, respectively.  This is unsurprising given the big drop in the unemployment rate in November to 4.6% from 4.9% in October. The FOMC median expects the unemployment rate to hold at that level through 2019.

Yellen noted in her press conference today that the “economic outlook is highly uncertain” and that “changes in fiscal policy could alter the outlook. … We will have to wait and see.”  We would concur.

Bottom line: The Fed is clearly comfortable with how the U.S. economy is currently performing and sees moderate economic growth continuing with further progress on their inflation and labor market mandates next year — even without a huge fiscal stimulus package from the Trump Administration.  The caution that swept over the FOMC earlier this year on disappointing U.S. growth and global risks surrounding Brexit and China has diminished, and in that regard the FOMC statement and decision is being interpreted by the markets as more hawkish than expected.

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