FOMC Raises Rates

Gary Pzegeo, CFA
December 14, 2017

The FOMC raised the target range for the federal funds rate by 0.25% to 1.25% - 1.50%. Fed officials have been signaling a willingness to raise rates at this meeting for some time and markets were prepared for the move.
 

The FOMC raised the target range for the federal funds rate by 0.25% to 1.25% - 1.50%. Fed officials have been signaling a willingness to raise rates at this meeting for some time and markets were prepared for the move. The December meeting includes a release of economic and rate projections and is followed by a press conference, likely the last for Chair Yellen. With the rate change essentially priced into market expectations, more attention may be paid to how the committee expects growth and inflation to unfold in the coming years.

Following is a summary of the FOMC’s statement.

Growth

  • The Fed noted a pick-up in economic activity and the post-hurricane decline in unemployment. 
  • Projections for growth in 2018 have increased to 2.5% from 2.1%.  The Fed’s models may be taking tax reform into account.

Inflation

  • The statement was very similar to prior releases regarding inflation.  Headline and core inflation are running below 2%.  Both market-implied and survey-based measures remain steady.
  • Board members project the 2% target to be reached by 2020.

Policy

  • As noted, the target range for federal funds is now 1.25% – 1.50%
  • Neel Kashkari and Charles Evans both voted for no change in the target. 
  • The median projected rates were unchanged for 2018 and 2019.  The Fed expects that 3 rate increases will be required by the end of next year, although the range of estimates remains fairly wide.

Markets read the dissention, rate projections, and lack of anticipated inflation as dovish signals.  10 and 2 Year Treasury yields fell by 0.03% while the Dollar index fell by approximately 0.3%.

Gary Pzegeo joined Atlantic Trust in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.