As Expected, Fed Hikes Rates (Here’s Everything You Need To Know)

Well, it was always all about the dots and we did get a little drama in that regard. Below, find everything you need to know about the Fed hike.

From Barclays:

US FOMC: A rate hike and a modest hawkish surprise

At its meeting today, the FOMC raised the target range for the federal funds rate to ½ to ¾ percent from ¼ to ½ percent. In its view, at this level, the policy rate remains accommodative, “thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.” The statement focused on the cumulative progress the economy made over 2016. The committee maintained its assessment that “risk to the economic outlook appear roughly balanced.” Further, the statement notes that in determining the timing and size of future adjustments to policy, the committee will assess realized and expected economic conditions.

The SEP

In the summary of economic projections, the SEP, the median member believes that three rate hikes in 2017 is likely appropriate. We had anticipated that remaining at a two rate hike median would be a close call. However, that 11 of the 17 members thought there should be three hikes or more is quite a bit more hawkish than we had expected. Two members see only a single rate hike as appropriate next year. Beyond 2017, the dot plot was in line with our expectation, with three hikes in both 2018 and 2019.

Their projections for activity, as expected, were substantively unchanged, with median real GDP growth up 0.1pp in 2017 and all other GDP and inflation medians unchanged. On the unemployment rate, the median rate in 2016 and 2019 was lowered 0.1pp, but the path is otherwise unchanged.

Takeaway

In all, the statement is somewhat, but not extremely, hawkish relative to our expectation. The FOMC seems prepared to hike rates three times in 2017. We believe the current forecasts, including the “dot chart,” do not incorporate any major policy changes on the part of the incoming administration. As we wrote on November 9, 2016, three rate hikes are indeed possible, only if the new administration does not enact tariffs or other trade restrictive policies in the first months of 2017. In our view, the slowdown in growth early in the year associated with tariffs would preclude an early year rate hike. Likewise, if the administration enacts a large tax and spending bill that substantively boosts activity and inflation, subsequent dot charts could show a much steeper path of policy hikes.

*Update: Yellen: Rate Hike Is Vote of Confidence; Fed Isn’t Behind Curve

Fed Chair Janet Yellen said decision to raise rates Wednesday “is a vote of confidence in the economy,” and she doesn’t see central bank as “behind the curve.”

  • Rate hike is “reflection of the confidence that we have” in the progress economy has made, should have only a small impact on market rates, Yellen said in response to questions at press conference
  • “I do not judge that we are behind the curve”
  • “We’re on a good path toward reaching our objectives”
  • Policy remains accommodative to “moderate” degree
  • Inflation is still operating below Fed’s objective
  • Not seeing evidence in labor markets of pressure that could signify extreme shortages of labor that might rapidly propel inflation higher

DOTS:

dots

*Update: Yellen: Some on FOMC Considered Fiscal Policy on 2017 Hikes

Fed Chair Janet Yellen says three hikes implied by FOMC’s median dot for 2017 reflects “a very modest” adjustment in path of fed funds rate made by only “some” participants.

  • Some participants, not all, “did incorporate some assumption of a change in fiscal policy into their projections,” Yellen said in response Wednesday to questions at press conference
  • The change in the dots is “really very tiny”

Federal Reserve increases federal funds target range to 0.5% to 0.75%.

  • Fed says labor mkts continued to strengthen, growth moderate
  • Fed says job gains have been solid in recent months
  • Fed says spending rising moderately, investment stayed soft
  • Fed says inflation has increased since earlier this year
  • Fed lifts rate paid on excess reserves to 0.75% vs 0.5%
  • Fed raises discount rate to 1.25% from 1.0%
  • Fed officials see three 2018 rate hikes, unch vs sept. dots
  • Fed median est. for longer-run funds rate 3% vs 2.9% in sept.
  • FOMC instructs ny fed to raise rrp rate to 0.5% vs 0.25%

FOMC Sees Longer-Run Median Fed Funds Rate at 3.0%
Fed prior median longer-run Federal funds rate 2.9%

  • Longer-run median unemployment rate 4.8% compares to previous forecast of 4.8%
    • Fed sees 2016 jobless rate median at 4.7% vs 4.8% at Sept. 21, 2016 meeting
    • 2017 median jobless rate 4.5% vs 4.6%
    • 2018 median jobless rate 4.5% vs 4.5%
    • 2019 median jobless rate 4.5% vs 4.6%
  • Longer-run real GDP median projection of 1.8% compares to previous forecast of 1.8%
    • 2016 median GDP growth 1.9% vs 1.8%
    • 2017 median GDP growth 2.1% vs 2.0%
    • 2018 median GDP growth 2.0% vs 2.0%
    • 2019 median GDP growth 1.9% vs 1.8%
  • Longer run PCE inflation median at 2.0% compares to previous forecast of 2.0%
    • 2016 median PCE inflation 1.5% vs 1.3%
    • 2017 median PCE inflation 1.9% vs 1.9%
    • 2018 median PCE inflation 2.0% vs 2.0%
    • 2019 median PCE inflation 2.0% vs 2.0%
  • 2016 median core PCE inflation 1.7% vs 1.7%
  • 2017 median core PCE inflation 1.8% vs 1.8%
  • 2018 median core PCE inflation 2.0% vs 2.0%
  • 2019 median core PCE inflation 2.0% vs 2.0%
  • Longer run Fed funds median at 3.0% compares to previous forecast of 2.9%
    • 2016 median Fed funds 0.6% vs 0.6%
    • 2017 median Fed funds 1.4% vs 1.1%
    • 2018 median Fed funds 2.1% vs 1.9%
    • 2019 median Fed funds 2.9% vs 2.6%
  • FED OFFICIALS SEE THREE 2017 RATE HIKES VS TWO IN SEPT. DOTS
  • FED FUND FUTURES FULLY PRICING RATE HIKES IN AUG, DEC 2017
  • Full statement:
    • Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments. 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 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.

The Charts That Matter (you can clearly see the reaction to the Fed at 14:00:00):

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