Fed Meeting: Scrutinizing for clues to Next Year – BMO CM


The FOMC is widely expected to raise policy rates 25 bps this week, for the third time this year and fifth time since rate hikes started two years ago, according to Michael Gregory, Deputy Chief Economist at BMO Capital Markets.

Key Quotes

“The market is pegging the odds (at least) at 92%. And, all eyes will be on the statement, Summary of Economic Projections (SEP) and Chair Yellen’s swan-song press conference for clues to Fed policy in 2018.”

“In the statement, we don’t anticipate much change to the overall economic assessment. The previous verbiage that the “labor market has continued to strengthen and that economic activity has been rising at a solid rate” remains as valid as before. However, the recent stabilization and slight turn up in measured inflation might get mentioned. We expect no mention of the tax cut legislation currently making its way through Congress (although this will likely show up in the subsequent Minutes). Minneapolis President Kashkari might dissent, as he did for the June rate hike.”

“In the SEP, we’ll likely get some technical tweaks to the economic projections for 2017, given actual data and the proximity to year-end. Where we could see more meaningful shifts is in the unemployment rate. With the jobless rate currently at 4.1% (it sat at 4.4% last SEP), the 2018, 2019 and 2020 median calls for 4.1%, 4.1% and 4.2%, respectively, could be ratcheted down, as could the 4.6% longer-run level. The median call for the fed funds rate looks locked-in for next year (2.125%) given the frequency of forecasts (6 participants). But there could be a tiny shift to 2019, which is currently sitting in between 2.625% and 2.750%. New Fed Vice-Chair for Supervision Randall Quarles gets to cast his first dot.”

“Finally, in the presser, we don’t think Chair Yellen will say anything she hasn’t said before, keeping to the tone of her recent (November 29) appearance before the Joint Economic Committee. No doubt she’ll be asked by the media about a potential Fed reaction to a $1.4 trillion net tax cut. Her answer will be coy. But, with the output gap now closed and the economy essentially at full employment, with household spending and business fixed investment already growing decently (particularly the latter), and with inflation finally showing signs of turning up again, we suspect she’ll be biting her tongue to avoid saying what she really thinks. On balance, we’re not expecting many clues to next year.”

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