Discrepancy between market and Fed’s rate path reflects difference in inflation outlook

In accordance with changes in the economic outlook, the updated interest rates projections show that the "leadership", as proxied by the average of the 4-6 dots, modestly lowered the pace of the hiking cycle. 

"The fed funds rate is now expected to rise to 1.125% by year-end 2016, compared with 1.375% at the June meeting, implying roughly three hikes in 2016, compared with four earlier", says Barclays. 

Further, the long-run projections were also modestly lowered to 3.25% from 3.5%. Needless to say, the market continues to trade through these forecasts with fed fund futures now pricing in the Fed to hike to 0.8% by year-end 2016 and 1.35% by year-end 2017. 

"The discrepancy mainly reflects the difference in the inflation outlook. The CPI swap market is pricing in little acceleration in inflation whereas the Fed expects y/y core PCE to rise from current 1.2% to 1.7% by yearend 2016 and 1.9% by year-end 2017", added Barclays.