As has been tipped since at September the Federal Reserve increased the
Fed funds target range by 25 bp to 50-75 bp. The market's
understanding of the Fed reaction function and the communication left little
doubt in the mind of investors that rates were going up today. However,
there is little additional information or guidance offered. Visibility
has diminished by the election and the unknown state of fiscal policy going
forward.
The FOMC statement tweaked the
economic assessment to reflect the recent economic data.
However, officials seem more confident that although growth is unspectacular it
is not as fragile as it may have appeared. The Fed did recognize the
unemployment rate has declined, while in November, it was still little
changed.
It also recognized that "market-based measures of inflation compensation," which is the yield curve
and the breakevens, have moved up "considerably,"
which is a new qualifier. However, it still assessed these to be low.
This seems to be behind the increase in
the number of rate hikes that are seen as
appropriate next year from two to three. The Fed funds futures had priced
in two hikes by the end of next year. On the other hand, economists in a
recent Wall Street Journal survey anticipated three hikes.
The economic projections adjustments were mild, taking growth slightly
higher, but growth over the next three years is currently not expected to be
above 2.5%. Obama is the first president since the Great Depression
that has not experienced one year of his term with
3% or higher growth. Unemployment is expected to drift lower. The central
tendency does not show the core PCE deflator rising above 2.0% until
2019. The median long-run Fed funds expected was raised to 3.0% from
2.875% in September. To the extent that the long-run GDP forecast is the
same as trend growth, it is notable that it was
lifted to 1.8%-2.0% from 1.7%-2.0%.
The curve flattened in response to the Fed's anticipation of three
hikes next year. The December 2017 Eurodollar futures yield rose 10 bp,
and the two-year yield rose six bp, while
the 10-year yield rose 3. The dollar
strengthened across the board, with the dollar moving above JPY116 for
the first time in ten months. The US two-year premium over German jumped
to almost 200 bp. The German two-year yield fell to a new record low today.
Yellen acknowledged that fiscal policy is one of the major factors that could
impact economic conditions and monetary policy. In her press conference, Yellen played down
the changes to the forecast suggest hat that they were very small and reflected
the changes of a few members. She was not baited by questions about the fiscal stimulus promised by the President elect. She explained that some supply-side changes could boost growth potential and not be inflationary.
Disclaimer
Fed Hikes, Sees Three More in 2017--A Year Ago it Saw Four in 2016
Reviewed by Marc Chandler
on
December 14, 2016
Rating: