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Fast Comment USFed hikes rates and keeps policy outlook unchanged

  1. Higher growth and lower unemployment, but unchanged inflation and policy outlook
  2. We maintain our forecast of two rate increases in 2018, but risks are on the upside
  3. Powell will replace Yellen as Fed Chair in the beginning of February
Fed hikes rates and keeps policy outlook unchanged
At its policy meeting on December 12-13, the Fed raised the target range for the federal funds rate by 0.25 percentage points, as anticipated. It also left its policy rate outlook for 2018 and 2019 unchanged, even as Fed officials forecast a short-term acceleration in economic growth and revised down their unemployment rate projections. Moreover, the labour market has continued to strengthen and economic activity has been rising at a solid rate, according to the statement. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. However, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. Finally, Charles L. Evans of Chicago and Neel Kashkari of Minneapolis voted against the action. They preferred to maintain the existing target range for the federal funds rate.
Higher growth and lower unemployment, but unchanged inflation and policy outlook
The focus ahead of the meeting was on the release of Fed officials’ new economic projections and on their federal funds rate forecast in particular. The median of the officials’ policy rate forecasts implies three rate increases of 0.25 percentage points each in 2018, which is the same forecast as in September. Moreover, the forecast is to raise the interest rate to 2.1 percent by the end of 2019 (as in September), and to 3.1 percent by the end of 2020 (a notch higher than in September). Moreover, GDP is now expected to grow by 2.5 percent in 2017, 2.5 percent in 2018, 2.1 percent in 2019 and 2.0 percent in 2020, compared to 2.4 percent, 2.1 percent, 2.0 percent and 1.8 percent respectively in September. The forecast for core inflation, excluding food and energy, is now 1.5 percent, 1.9 percent, 2.0 percent, and 2.0 percent, which is the same as in September. Finally, Fed officials now expect the unemployment rate to be 4.1 percent, 3.9 percent, 3.9 percent and 4.0 percent respectively, compared to 4.3 percent, 4.1 percent 4.1 percent and 4.2 percent in September.
We maintain our forecast of two rate increases in 2018, but risks are on the upside
The announcement of three rate increases in 2018 and an unchanged inflation forecast, at the same time as the Fed revises up its outlook for growth and revises down its unemployment forecast, were not expected. Some economists might even consider this to be inconsistent and would likely fear that inflation in the future could become stronger than the Fed currently anticipates. For now, we maintain our forecast of two interest rate increases next year of 0.25 percentage points each, although we see risks to the upside. However, Jerome Powell will replace Janet Yellen as Fed Chair in the beginning of February, and many investors would likely want to await guidance from the new Chair before they change their view on the Fed.

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