Dec FOMC: A Rate Hike And A Modest Hawkish Surprise

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The Fed raised rates and pushed the dollar higher, especially by laying out three hikes in 2017. Here is the view from Barclays

Here is their view, courtesy of eFXnews:

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, 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.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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