A Holly Jolly Rate Hike

By Richard Branch, Senior Economist, Dodge Data & Analytics

BEDFORD, MA – DECEMBER 14, 2017 - As widely expected, the Federal Reserve’s Open Market Committee (FOMC) raised its federal funds rate 25 basis points to a range of 1.25 – 1.5% at Fed Chair Janet Yellen’s last meeting. This marks the third rate hike of 2017, and the fifth since the FOMC began normalizing monetary policy at the end of 2015.

There was little new information in the accompanying press release, with most of the changes in the wording of the release relating to the transitory nature of hurricane impacts on employment and inflation. There were, however, subtle changes to the FOMC’s economic outlook. The committee boosted their GDP forecast for 2018 from 2.1% to 2.5% due to net fiscal stimulus and some added momentum from 2017. GDP in the latter years of the forecast was also upgraded by a tenth of a point or two. The forecasted track for the unemployment rate was lowered by 20 basis points through 2020. Interestingly, there was no change to inflation projections beyond this year. This suggests that the Fed believes that the tech-driven disinflationary trend will continue to offset the inflationary pressures of an economy that is quickly reaching full employment.

The forecast for future rate hikes was unchanged from September – three in 2018 and two or three in 2019. There were two dissenters at the meeting, Minneapolis President Kashkari and Chicago President Evans. Both lean to the dovish side, and both will not be voting members on the committee in 2018.

The Fed’s updated economic projections are more in line with ours at Dodge Data & Analytics, and paints a more balanced economic growth picture in 2018, with increased business investment contributing more to growth than in years past.

As the Fed continues to gradually tighten, both short-term rates and the dollar will feel upward pressure; however, with a fairly muted expectation for long-term inflation the effect on longer-term rates, like mortgage rates will be tempered. 



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