With a 98.3% probability heading in, there was really no doubt the most-telegraphed rate-hike ever would occur, but all eyes are on the dots (rate trajectory shows 3 hikes in 2018), inflation outlook (unchanged), and growth outlook (faster growth in 2018), and lowered unemployment outlook to below 4%. The Fed also plans to increase its balance sheet run off to $20 billion in January.
- *FED RAISES RATES BY QUARTER POINT, STILL SEES THREE 2018 HIKES
- *FED SEES FASTER 2018 GROWTH, LABOR MARKET STAYING `STRONG’
- *FED: MONTHLY B/SHEET RUNOFF TO RISE TO $20B IN JAN. AS PLANNED
The dissents by Evans and Kashkari are significant as they send the signal that there is a significant fraction of the FOMC that would like to put off additional rate hikes until inflation is moving back closer to 2%. You could expect additional dissents in March if the FOMC goes ahead with a hike then, unless inflation rebounds by then.
On the other hand, the median target “dot” for 2020 rose to 3.063% vs 2.875% in September; suggesting even further tightening in store.
The Fed’s forecasts improved for growth and unemployment, while keeping inflation unchanged:
The Dot Plot shows a slightly more hawkish bias to rate trajectory…
- *FED MEDIAN SHOWS FUNDS RATE 3.1% AT END-2020 VS 2.9% IN SEPT.
- *FED LEAVES ESTIMATE OF LONGER-RUN FUNDS RATE AT 2.8%
Comparing the Sept and Dec dots we see the following median rate forecasts:
- 2017 1.375% (range 1.125% to 1.375%); prior 1.375%
- 2018 2.125% (range 1.125% to 2.625%); prior 2.125%
- 2019 2.688% (range 1.375% to 3.625%); prior 2.688%
- 2020 3.063% (range 1.125% to 4.125%); prior 2.875%
- Longer Run 2.75% (range 2.250% to 3.000%); prior 2.75%
As for the projection interval, the forecast ranges narrow for 2018, 2019 and longer-run; widens for 2020:
- 2018 range 1.125%-2.625% vs 1.125%-2.725% in September
- 2019 range 1.375%-3.625% vs 1.125%-3.375% in September
- 2020 range 1.125%-4.125% vs 1.125%-3.875% in September
- Long-run range 2.25%-3% vs 2.25%-3.5% in September
More specifically, while now two FOMC members expect the fed funds to rise above 4% in 2020, the 3.5% Long Term “dot” is now gone as the lone “long-term” optimist has disappeared.
Notably, as Bloomberg points out, the dot plot implies that a growing number of Fed officials think policy will need to be restrictive in 2020 – presumably to tamp down on inflation risks amid an overheating economy. Eight 2020 dots are above even the highest estimates of the long-run dot.
* * *
Was there any doubt?
Since the last FOMC meeting in November, gold is the big loser and stocks the big winner.
At the same time, the yield curve has collapsed since the last FOMC Meeting…
Though this morning’s CPI did lower next year’s market view…
Full Redline below: