FOMC Dot plot: 3 instead of 2 hikes in 2017 - Rabobank

Philip Marey, Senior US Strategist at Rabobank, notes that as widely expected, the FOMC raised the target range for the federal funds rate to 0.50-0.75% from 0.25-0.50%.

Key Quotes

“The decision was unanimous. The Committee made this decision in view of realized and expected labor market conditions and inflation. They expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.”

“Far more interesting was the dot plot, with the FOMC participants now expecting 3 instead of 2 hikes in 2017 (compared to the September projections). They still project 3 hikes for both 2018 and 2019. The median longer run rate projection was revised slightly upward to 3.0% from 2.9%. This implies that the Committee expects to end its hiking cycle somewhat earlier in 2020.”

“However, the economic forecasts were upgraded only marginally. For 2017, GDP growth was raised to 2.1% from 2.0% and the unemployment rate was reduced to 4.5% from 4.6%. What’s more, the inflation forecasts remained unchanged for 2017-2019.”

“Yellen did not explain this contrast and during the Q&A she downplayed the size of the dot plot adjustment, she called it ‘very tiny’ and said that only ‘some’ participants had changed their rate projections.”

“We would like to note here that only two dots at the median level in 2017 moving up would have been sufficient to change the median number of hikes from 2 to 3 between September and December. So the upward shift in the median may indeed be a less significant shift in the FOMC’s views than it would appear.”

“However she did admit that fiscal policy was a factor in these revisions, although in her prepared statement she maintained that it is far too early to assess the impact of fiscal policy.”