FOMC meeting goes as per expectations - Nomura

As widely expected, the FOMC raised targets for short-term interest rates at the December meeting, bringing the RRP and IOR rates to 1.25% and 1.50%, respectively, notes the research team at Nomura.

Key Quotes

“The Committee’s policy statement reflected strong incoming economic data and reaffirmed the FOMC’s expectation that inflation will gradually move up to target. Median growth forecasts were revised upwards modestly for 2017-20, while the unemployment rate path was revised downwards 0.2pp throughout the forecast horizon but not for the longer-run (unchanged at 4.6%). The median forecast for core PCE inflation remained unchanged throughout.”

“Regarding the forecasted path of the policy rate, the median target rates for 2018 and 2019 remain unchanged while the 2020 median ticked up slightly. The projected longer run policy rate remains unchanged at 2.750%. Importantly, Chair Yellen indicated that “most” participants had now incorporated expected tax policy into their forecasts. The Committee showed a degree of patience about the near-term implications of tax policy with the median policy rate target for 2018 unchanged. In this sense, the Committee’s actions today leave notable flexibility for the March 2018 meeting: choosing to hike again at that meeting or leaving rates unchanged would both be consistent with the outlook presented today. However, neither the statement nor the press conference addressed increased federal spending, indicating some upside risk to their forecast.”

“The combined forecasts of stronger growth, lower unemployment and stable inflation implies that the economy could be less sensitive to a cyclical overshoot than the Committee previously thought, possibly requiring the need for a larger cyclical overshoot. Moreover, less confidence in understanding inflation, as indicated by Chair Yellen at the press conference, means the Committee will likely put more weight on actual inflation, resulting in a lower rate path in the short term. However, that could also mean a stronger reaction if inflation picks up notably. Overall, today’s developments left our forecast of three hikes next year, in March, June and December, unchanged.”