The Federal Open Market Committee (FOMC) opted to raise short-term rates for the first time so far in 2016 at the conclusion of its December 13–14 meeting. The target of the federal funds rate was increased by 25 basis points, with the range now between 0.50 to 0.75 percent. This move was widely expected, with financial markets having already pricing in this move. Moving into 2017, FOMC participants appear to be more hawkish than they were three months ago, with economic projections appearing to forecast three rate hikes next year. That is up from a median prediction of two rate hikes at their September meeting. Beyond next year, Federal Reserve participants also see three increases in both 2018 and 2019.
To be fair, the Federal Reserve is playing catch-up a little here, with the bond market already sending yields significantly higher since the election. Indeed, yields on 10-year Treasury bonds have already risen more than 60 basis points since early November.
The economic forecast did not change much in this release. The Federal Reserve sees real GDP increasing 2.1 percent in 2017, with the unemployment rate edging down to 4.5 percent. My forecast for next year is higher, as I currently expect 2.5 percent economic growth in 2017. The Fed does not predict core inflation exceeding 2.0 percent in its projections through 2019.
Looking specifically at the monetary policy statement, the FOMC found that “the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.” Future increases in the short-term rate will hinge on incoming data, as normal. On that note, the “Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
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