While most observers had expected correctly that the Federal Reserve would hike interest rates by 25 basis points today – markets had priced in literally a 100% chance – they did not think the Federal Open Market Committee (FOMC) would materially change its September projection for two hikes in 2017. So while the Fed did hike its target for the federal funds rate to a range of 0.5% to 0.75%, the real message was delivered by the “dot plot,” which moved unmistakably in the hawkish direction for 2017.
Four of the meeting’s 17 participants who had projected two hikes for 2017 at the last meeting appeared to project three hikes for 2017 (and one participant who had voted for more than three hikes appeared to vote for three). In terms of the “longer-run dots,” one member raised his forecast from 2.75 to 3 hikes, which was enough to very modestly raise the median for the longer-run nominal fed funds rate from 2.875% to 3.0%.
As to the language in the Fed statement, the changes were modest and mostly marked-to-market the reality of the incoming economic data. The statement characterized economic growth as “moderate,” not “modest.” It also acknowledged that measures of breakeven inflation – inflation compensation – had risen “considerably.”
In sum, four members of the FOMC appeared willing to place at least a modest bet that Trumponomics will justify three hikes instead of two in 2017.
For a Fed that is always reminding us that it is “data dependent,” this is at least a bit puzzling, as the Fed projections for GDP growth in 2017 were marked up by only 0.1 percentage point (from 2.0% to 2.1%) and the inflation forecast, at 1.9%, was not revised at all. Go figure.
Richard Clarida is PIMCO’s global strategic advisor and a frequent contributor to the PIMCO blog.