In a widely anticipated move, the Federal Open Market Committee (FOMC) increased interest rates by 25 basis points on 13 December.
But while rates were raised, the FOMC’s communications suggest a more dovish outlook:
- The FOMC updated its Summary of Economic Projections (SEPs), raising its median forecast for real GDP growth by 0.4 percentage points (ppt) in 2018 and 0.1 ppt in 2019 to reflect the impact of proposed tax reform. The change was less than expected as some members had previously factored in a tax boost to growth.
- The FOMC’s inflation projections didn’t change, although Chair Janet Yellen said that "incoming data" had caused the committee to review its outlook and that many FOMC participants "did some fundamental rethinking of their view on inflation." Softer inflation data ahead of the decision – core CPI fell to 1.7% year-on-year in November from 1.8% in October – does not boost confidence in rising prices.
- The median forecast for the unemployment rate in 2018 has decreased to 3.9%, compared with current levels of 4.1%. However, the FOMC said that even with a strong labor market, inflation continues to run below target and Yellen noted again that "our understanding of the forces driving inflation is imperfect."
Overall, the FOMC appears in no rush to stray from gradual tightening. We think it is unlikely that policy is tightened at a pace that could cause a recession or derail equities – and Yellen dismissed concerns that a flatter yield curve reflects growth concerns. We expect the FOMC to hike rates twice in the latter part of 2018 and we remain overweight global equities.
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