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FOMC Monetary Policy December 2017: Assessing future bias from statement and projection materials

As expected, the policymakers at FOMC         hiked interest rates by 25 basis points at yesterday’s meeting. Current Federal funds rate target 125-150 basis points.

Let’s first assess the bias in monetary policy statement –

  • Improvement in the labor market continues to strengthen, economic activity rising at a solid rate. (hawkish bias)
  • Jobs gains have been solid despite hurricane-related fluctuations. The unemployment rate declined further. (Hawkish bias)
  • Growth in household spending expanding at moderate pace. (Neutral bias)
  • Business fixed investment picked up in recent quarters.  (Neutral bias)
  • Inflation measured on a 12-month basis has declined this year. Both including and excluding energy and food, consumer prices running below 2 percent. The market-based measure of inflation compensation low. Survey-based inflation measure little changed on balance. (Neutral bias)
  • Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. (Neutral bias)
  • FOMC expects gradual policy adjustments and expects further strengthening in the labor market and moderate expansion in the economy. Inflation is expected to remain below 2 percent in the near term but stabilize near targeted 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely. (Neutral bias)
  • Fed is closely monitoring the global economic and financial developments as well as measures of inflation. (Neutral bias)
  • The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate and the rate to remain below longer-run levels. (Neutral bias)

Though the dollar has reacted negatively to the release, the statement clearly indicates a more hawkish stance from Fed. So, to gauge the upcoming Fed action, one would have to look at upcoming data, especially inflation.

The dollar’s weakness stemmed from the fact that another policymaker, Charles Evans has joined Neel Kashkari in calling for a rate pause.

Now, let’s take a look at the changes made in projection materials.

  • FOMC upgraded its growth forecast for 2017 from 2.4 percent to 2.5 percent. Upgraded its 2018 growth forecast from 2.1 percent to 2.5 percent. Upgraded growth forecast for 2019 from 2 percent to 2.1 percent. (Hawkish bias)
     
  • FOMC upgraded its unemployment rate forecast for 2017 from 4.3 percent to 4.1 percent. Upgraded 2018 forecast from 4.1 percent to 3.9 percent, and 2019 from 4.1 percent to 3.9 percent. (Hawkish bias)
     
  • FOMC upgraded inflation forecast for 2017 from 1.6 percent to 1.7 percent. (Neutral bias)
     
  • FOMC kept its core inflation forecast unchanged. (Neutral bias)
     
  • FOMC upgraded its Federal funds rate forecast unchanged. The forecast suggests rates to be at 1.4 percent in 2017, 2.1 percent in 2018 and 2.7 percent in 2019. (Neutral bias)

The statement and projection material show, four hawkish bias and no dovish bias and we can conclude that this policy was in no way a neutral or unchanged one. However, the Charles Evans’ dissent weighed on the dollar.

The dollar index is currently trading at 93.45 against a basket of six currencies.

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