On Wednesday, December 14, the U.S. Federal Reserve concluded a two-day meeting. The result of the meeting was the long-awaited increase in the federal funds rate from less than 0.5% to less than 0.75%. The decision was unanimously approved by all 10 members of the FOMC.
U.S. Federal Reserve Forecasts
According to the forecast, the Fed expects three interest rate hikes in 2017, 2018, and 2019.
Median rate forecast:
- 2016: 0.625% (unchanged);
- 2017: 1.375% (against 1.125% in September);
- 2018: 2.125% (against 1.875% in September);
- 2019: 2.875% (against 2.625% in September);
- Long-term: 3.1% (against 2.9% in September).
In September, the regulator also expected three increases for 2018 and 2019, and two for 2017. Thus, the overall Fed rate expectations increased by only one hike compared to the September meeting. In any case, this is better than market expectations. Investors had predicted two hikes for 2017.
Meeting participants note that there is less consensus on tightening monetary policy after 2017 than in the short-term perspective.
U.S. GDP forecast improved:
- For 2016: 1.9% (against 1.8% in September);
- For 2017: 2.1% (against 2.0% in September);
- For 2018: 2.0% (unchanged);
- For 2019: 1.9% (against 1.8% in September);
- Long-term: 1.8% (unchanged).
Unemployment rate forecast:
- For 2016: 4.7% (against 4.8% in September);
- For 2017: 4.5% (against 4.6% in September);
- For 2018: 4.5% (unchanged);
- For 2019: 4.5% (against 4.6% in September);
- Long-term: 4.8% (unchanged).
Inflation (PCE) forecast:
- For 2016: 1.5% (against 1.3% in September);
- For 2017: 1.9% (unchanged);
- For 2018: 2.0% (unchanged);
- For 2019: 2.0% (unchanged);
- Long-term: 2.0% (unchanged).
The regulator noted balanced risks in the short-term, improvements in the labor market, and moderate growth in economic activity and household spending. Corporate investment in capital remained weak.
Speech by Janet Yellen
The head of the Fed noted that the rate hike in December was appropriate due to significant progress toward achieving target indicators. It is expected that the labor market will strengthen further. Inflation growth will depend on the strength of long-term inflation expectations.
A very important remark by Ms. Yellen was the mention of Donald Trump’s policy. According to her, some meeting participants considered possible changes in U.S. fiscal and budgetary policy when forming their forecasts.
Nevertheless, it is difficult to assess the impact of the new president’s measures on the Fed’s forecasts, explained the head of the regulator.
Summary and Reaction of the EUR/USD Pair
What do we have in the end? Slightly improved forecasts for GDP and unemployment. Inflation forecasts are almost the same. Over the next 3-4 years, there will be 10 rate hikes instead of 9 as expected in September. So, will the new Trump policy affect the pace of rate hikes?
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The Fed did not express concerns about potential faster price increases (inflation has been rising at very high rates in recent months).
No clearer comments were made about interaction with the new U.S. administration. After all, it is expected that Trump will insist on higher interest rates. These expectations were not reflected in the Fed’s rate forecasts.
It is possible that the Fed does not want to shock the markets and that adjustments to the forecasts will still have to be made with the arrival of the new U.S. president.
It is also possible that the current composition of the Fed is nearing its last months, since Trump may wish to replace the regulator’s leadership, which he has repeatedly criticized negatively.
In conclusion, Yellen said that the Fed is not falling behind the events. But it is quite possible that it actually is. If the markets understand this, the dollar‘s rise may continue.
Regardless, the EUR/USD pair fell to around 1.055 or by approximately 0.5-0.8%. All this was dictated by slightly more hawkish rhetoric from the Fed, but only slightly compared to market expectations, experts from ForTraders.org note.
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FAQ
What was the outcome of the December 14 FOMC meeting?
The FOMC increased the federal funds rate from less than 0.5% to less than 0.75%.
How did the Fed’s rate forecasts change compared to September?
The Fed expects three rate hikes in 2017, 2018, and 2019, with median rate forecasts rising slightly for each year.
What impact did Trump’s policies have on the Fed’s decisions?
The Fed acknowledged potential changes in fiscal policy but did not adjust its rate forecasts to reflect expectations of Trump’s policies.
