HomeContributorsFundamental AnalysisFed Delivers December Hike, With More Tightening in Store Next Year

Fed Delivers December Hike, With More Tightening in Store Next Year

Highlights:

  • As expected, the target range for the fed funds rate was raised by 25 basis points to 1.25-1.50%.
  • The committee’s median GDP growth forecast for 2018 was raised to 2.5% from 2.1%. Growth projections for 2019 and 2020 were also revised higher but inflation forecasts were little changed.
  • The ‘dot plot’ continued to show a range of views on how much tightening will be appropriate next year. The median call for three rate increases was unchanged from September.
  • Two dissenters favoured leaving rates unchanged. Only one dissented against June’s hike.

Our Take:

Today’s rate hike was fully expected so it was the outlook for monetary policy next year that drew our attention. In that respect the Fed gave us something to talk about, boosting their 2018 growth forecast quite substantially and predicting sub-4% unemployment over the next two years. Chair Yellen confirmed that expected changes in tax policy were responsible for some of the upward revision to growth forecasts. But even with stronger activity likely pushing the economy beyond its longer run capacity limits, the median forecast for three rate hikes next year was unchanged and a handful of committee members think even less tightening will be appropriate. Lack of inflationary pressure, seen again in this morning’s CPI report, is keeping policymakers somewhat cautious. It is telling that most don’t expect inflation will rise much above 2% in the coming years, even with economic conditions expected to be very tight.

We are slightly above the ‘dot plot’ median in calling for four rate increases next year. For the Fed to move at that pace, we’ll need to see wages and inflation responding more to tight economic conditions than was evident this year.

RBC Financial Group
RBC Financial Grouphttp://www.rbc.com/
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

Featured Analysis

Learn Forex Trading