FOMC delivers as expected, but adds a hike in 2017 - SocGen

Omair Sharif, Research Analyst at Societe Generale, notes that the FOMC delivered the rate hike everyone was expecting, but they surprised by adding a third hike in 2017.

Key Quotes

“At this time, we continue to look for two hikes next year given the significant amount of uncertainty with respect to fiscal policy. In any case, the longer-run neutral funds rate inched up to 3.0%. Meanwhile, there were only modest changes to the FOMC statement, as expected, while most of the variables in the Summary of Economic Projections (SEP) saw only minor tweaks.”

“Yellen’s press conference

Yellen was asked several times about fiscal policy, but she largely avoided discussing how monetary policy might react to changes in fiscal policy. One reporter asked her why she sounded a note of caution on fiscal policy in her recent JEC testimony when she and Bernanke had been clamoring for help from fiscal policy in the past. Yellen noted that both she and Bernanke had wanted more from fiscal policy in the past, but that was a time when the economy was noticeably further away from full employment than it is today. Indeed, as we noted earlier, the slight change from noting that accommodative policy could further “strengthen” the labor market as opposed to help improve it, suggests that Yellen is comfortable with the idea that the economy is at or near full employment.

Yellen also noted that “if all goes well,” the Fed will have a “substantially” smaller balance sheet than it does now, but that letting the balance sheet run off will take several years.”