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Market Commentary

Fed Delivers as Expected

Posted on December 14, 2017

As expected, the Fed increased the overnight fed funds rate by 25 bps, to get the target to 1.25-1.50%. Yellen held her last press conference as Chair and indicated once again we shouldn't expect much difference in policy with the new Chair Jerome Powell.

Also, check out Tim Sustak's quick video on the results from the FOMC meeting. Tim is Vizo Financial's Chief Credit Officer and does a great job on providing a quick update on the Fed meeting.

Good morning!

  • As widely expected, the Fed said it would raise short-term interest rates for the third time this year and remained on track to chart a similar path next year
    • Fed officials said they would increase their benchmark federal-funds rate by a 25 bps to a range between 1.25% and 1.5%
      • It's the fifth increase since the bank cut the rate to nearly zero amid the 2008 financial crisis
      • The hurricane impacts have faded and the Committee concluded "Averaging through hurricane-related fluctuations, jobs gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business investment has picked up in recent quarters." 
      • On inflation, the description of core inflation as "soft" currently was dropped from the statement and Yellen noted during her opening statement that the softness in core inflation this year has primarily reflected "transitory" developments, something they have been saying for over a year now
      • The Fed maintained its strong outlook for the labor market by adding that "job gains have been solid, and the unemployment rate declined further"  
    • Officials revised up their projections for economic growth and said they expect to keep raising rates if the economy performs in line with their forecast
      • In terms of the dot-plot, 2017-2019 were unchanged
        • Overnight rate forecasts were little changed: 2017 1.4%, 2018 2.1%, 2019 2.7% and Longer-run 2.8%...…so, the median "dot" for the fed funds rate was unchanged at three hikes in 2018
      • Their median GDP forecast for 2018 is for 2.5% vs. 2.1% in September, and inflation projections were unchanged
      • The main takeaway from the FOMC decision this afternoon was the Fed will continue to hike despite the lack of inflation…which has been the case all of this year
      • A Fed March hike already has an implied 68% chance, while a June hike is already fully priced in
    • In Yellen's press conference, she acknowledged that the proposed tax cuts could have some modest positive economic effects, but the Fed projects the impact would be small
      • She also indicated that the implications for the national debt were not desirable
      • When questioned more than once about the implications of bitcoin for the Fed, Yellen said while that market bore some risks for investors, it was not large enough or connected enough to the banking system to pose any meaningful systemic financial risks
      • When asked about whether the flattening yield curve should be a cause for concern, Yellen said it was not worrisome
      • In answer to a question about her successor, Yellen commented Governor Powell has been a committed and very capable member of the Committee's consensus throughout his tenure on the FOMC…meaning there is expected to be considerable continuity in policy moving forward
  • As for the markets, they are more focused on the tax bill
    • Seeing the bill is primarily a corporate tax cut rather than an individual one, the Fed will be comfortable raising rates three more times in 2018 (many think) as it will keep financial conditions fairly easy
    • We also know the tax bill will require more borrowing from the Treasury, which given what the Treasury may have to issue, this may keep the curve flat for a while (especially if inflation remains elusive)
  • The markets focus will quickly turn to this morning's retail sales figures
    • Retail sales in November surprised on the upside, increasing 0.8%, versus the consensus of only 0.3%
      • Less autos, sales grew 1% versus the projected 0.6%
    • Another good sign the consumer is spending, but will it continue post-holiday season?
  • Again, take a quick moment to check out Tim Sustak's quick video on the results from the FOMC meeting
  • In the news:
  • Gold and oil down slightly
  • Treasuries
    • 2-yr: 1.82%
    • 10-yr: 2.37%
    • 30-yr: 2.74%
    • 1-month: 1.47%
    • 3-month: 1.57%
  • Fed funds effective was 1.17% (this will change today as trading near the new levels begin)

Have a great Thursday!!


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