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Fed raises rates by 25 basis points

Fed raises rates by 25 basis points

UNITED STATES — As expected, the FOMC voted to raise the target range for the fed funds rate to 0.50-0.75 percent, RBC Economics reported.

Today’s rate hike was unanimously expected following a run of positive economic data, particularly on the labor market, and indications from Committee members that a rate hike would soon be appropriate. The decision itself was unanimous, with the policy statement noting solid job gains, a lower unemployment rate, and the considerable increase in market-based inflation expectations (albeit to still-”low” levels) since the previous meeting.

Otherwise, there were few changes to the statement and no additional forward guidance was provided beyond the standard note that rate hikes are expected to be gradual and the fed funds rate is likely to remain below longer run levels for some time.

Changes to the Committee’s economic projections were more interesting but still relatively modest. Most notably, the updated ‘dot plot’ median showed members now see three rate hikes as appropriate next year, up from two previously (the latter is closer to current market pricing). The faster pace next year is likely motivated by tighter-than-expected labor market conditions, with November’s unemployment rate matching the previous 4.6 percent projection for Q4/17.

The Committee now sees the unemployment rate falling to 4.5 percent by the end of next year, below the longer run estimate of 4.8 percent consistent with full employment. The projected GDP growth rate edged up to 2.1 percent next year while both headline and core PCE inflation forecasts were unchanged. T

here was nothing obvious in the projections to indicate participants’ ‘base case’ forecasts include a boost to growth from fiscal stimulus in the coming years, although Chair Yellen noted that some participants did incorporate some assumption of a change in fiscal policy into their projections. Yellen repeated her earlier comments that it is too soon to judge the economic effects of Trump’s election.

Our Take:

The main takeaway from today’s meeting is that the Fed continues to see a gradual pace of tightening next year (albeit slightly faster than previously projected) even as the unemployment rate is expected to fall further below longer run levels.

Chair Yellen once again noted that monetary policy remains only moderately accommodative and that the risk of falling behind the curve is limited. Yellen generally sidestepped questions about the potential impact of fiscal stimulus on monetary policy, though she suggested that the rise in yields and equity prices incorporated “implicit forecasts” about how expansionary fiscal policy will impact the economy.

Our forecast assumes the current tightening cycle will remain slow by historical standards with another two rate hikes expected in 2017. Unless Congress and the Trump administration can come to an agreement on effective fiscal stimulus relatively quickly, we don’t see the Fed deviating from a gradual path next year.

SOURCE: RBC Economics press release

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About Darian Armer

Darian Armer is the assistant editor for RV Daily Report. She lives in Billings, Montana, where she enjoys spending time with her husband and three stepchildren. Introduced to the RV industry in 2012, she is happy to be writing for one of the greatest industries around.

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