Fed Funds Rate Lifted
The Fed raised rates yesterday in line with market expectation. Alongside the decision, the dot-plot forecast was also upgraded with the median forecasts now implying three 25bps hikes, up from two hikes in September. The FOMC statement offered a more positive outlook on the US economy, labour market an inflation despite the Fed retaining their cautious stance regarding risks to the domestic outlook.
The Fed noted that ““the economic activity has been expanding at a moderate pace” (from ”has picked up from the modest pace seen in the first half of this year”noted in the November FOMC) and “job gains have been solid in recent months and the unemployment rate has declined.”The Fed remained upbeat regarding domestic consumption adding that “ household spending has been rising moderately” although business investment was noted as remaining soft.
Regarding inflation, the Fed noted that they were confident of higher prices saying that “inflation has increased since earlier this year”. The key thing here is the Fed’s removal of the term “somewhat” from earlier this year. The Fed also noted that “market-based measures of inflation compensation have moved up considerably but are still low”.
Risks To The Outlook
Regarding risks to the US outlook, the Fed noted that it continues to see near-term risks to the economic outlook as “roughly balanced” and retained the statement that they continue “to closely monitor inflation indicators and global economic and financial developments”. As expected, however, the Fed did not comment on the new President or how his policies are expected to affect the domestic economy.
However, absent from the Fed’s statement was their judgement on the domestic fiscal outlook under the new administration and its impact on the US economy though Yellen did note during the press conference that it was too early to know how fiscal policy changes would unfold.
Notes From The Press Conference
In the press conference following the meeting Yellen noted that in raising rates the Fed is recognizing considerable progress in the economy towards achieving their goal of employment and inflation saying that “it is a vote of confidence in the economy”. Yellen noted that she expects the economy to expand at a moderate pace over the next few years adding that inflation is expected to rise to 2% over the same period.
When questioned regarding the Fed’s dot plot forecast over 2017 Yellen noted that it was a “very modest adjustment” and also clarified that the median forecast for three hikes over 2017 was driven by changes in only some of the participants’ views.
The Fed chair also noted that “there may be some additional slack in the labour markets, but I would judge that the degree of slack has diminished. So, I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment”. However, she clarified that this comment was not intended to be advice for Congress or the new administration on fiscal policy.
When questioned regarding her view on fiscal policy the Fed chair noted that it was too early to judge how fiscal policy changes would unfold and that changes in fiscal policy were just one of many factors affecting the US outlook and that policy is not on a preset course. Yellen also emphasised that she did not say that she favours “running a high-pressure economy” and that she is also a strong believer in the independence of the Fed noting that the Fed will not offer Trump any advice on how to run policy.
In response to the FOMC, the US dollar rallied sharply with the Dollar index breaking out to new highs. Treasury yields also spiked higher whilst Gold was sold heavily. The Dollar index has now broken above the 61,8% retracement with the 78.6% level the next key target.