After being on hold for a year the FOMC voted unanimously to increase
the fed funds rate to 0.50-0.75% at the December meeting. The decision
to raise the key rate was widely expected. Although the committee
decided to make monetary policy slightly less accommodative there were
only small changes to the previous statement. On the outlook for growth
and inflation FOMC-members revised the growth forecast marginally higher
while the inflation forecast was unchanged. However committee members’
median projection for the fed funds rate was raised slightly to include
three rate hikes (one more than before) in 2017 and three more rate
hikes in 2018. This is one additional hike this year compared to market
Reading Minutes from the meeting it becomes clear that members felt
that uncertainty had increased substantially since the last meeting.
Several times in Minutes it is mentioned that uncertainty regarding
fiscal and economic policies had increased. However at this juncture it
was agreed it would be too early to know what changes would be
implemented and the potential impact on the economy. Nevertheless almost
all members indicated that the upside risks to their forecasts for
economic growth had increased since the last meeting as a result of the
prospects for more expansionary fiscal policies in coming years and
about half of them had begun to incorporate it into their forecasts.
However there were also downside risks and particularly the
possibility of additional appreciation of the dollar was mentioned as a
downside risk for growth in Minutes this time. A stronger dollar was
also mentioned as a risk for inflation as it could hold down inflation.
It was also interesting to note that several members warned that if
the labour market appeared to be tightening significantly more than
expected it could become necessary to adjust current communications
about the path of the federal funds rate and to indicate that a less
gradual pace of increases could become appropriate.
Overall Minutes suggest that members have become more
optimistic on growth due to potential changes in fiscal and economic
policies although participants agreed it would be too early to
incorporate the effects in their forecasts at this juncture. Moreover
several members warned that the pace of tightening might have to
At this point we maintain our forecast of two rate hikes by the Fed this year with the next one expected in June.
Indeed the improvement in US growth related indicators, a strong labour
market and increased probability of more expansionary fiscal policy
after the Trump win upside risks to our current Fed forecast has
increased. On the other hand US interest rates have already increased
significantly and the dollar has strengthened against most currencies
since the presidential election in early Nov, causing US financial
conditions to tighten. Given the fact the Fed has been very cautious in
tightening monetary policy, few signs of rising cost pressure, and
considering that Q1 growth tend to be disappointingly weak we think it
is too early to change our call on the Fed already now.