Fed Watch: Another December, another hike


For the third December in a row, and amid virtual certainty for policy action, the Federal Reserve voted to raise the fed funds target range by 25 basis points at today’s Federal Open Market Committee (FOMC) meeting.

This time feels different, though. This time the Fed is no longer moving in spite of the surrounding data, but because of it. And unlike with previous actions, this time the market is a believer in the Fed in the magnitude of future policy moves.

The Fed cited solid economic growth, spurred by job gains and a continued drop in the unemployment rate in spite of hurricane-related disruptions. It increased the estimate of GDP growth across the board, but notably in 2018 from 2.1% to 2.5%. Unemployment rate estimates dropped to around 4%, but inflation projections remained unchanged, not reaching 2% until 2019. The press conference shed a little more light on the Fed’s view on price stability, as Chair Janet Yellen noted a slight uptick in core inflationary measures in recent months and reinforced the Fed’s view that the softness in 2017 is transitory in nature.

The recent and expected strong economic performance kept the Fed’s dot plot projections on track for three additional policy moves in 2018 and two in 2019 and nudged up its projections for 2020 to reflect an additional rate hike.

During the course of what was her final press conference, Yellen acknowledged that most of her colleagues factored in potential fiscal stimulus from a tax package into their outlooks. She also spent some time on labor-market conditions, noting that the language in the Fed’s statement had changed to indicate that allowing the labor market to overheat would jeopardize the expansion.

There were two dissenters from today’s action, Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans, both definitely on the dovish side but rotating off of the FOMC after today’s meeting. And once the calendar flips, the faces on the Fed for 2018 will eventually look different.