Updated: 12-18-2017

The December policy directive from the Federal Open Market Committee (FOMC) didn't offer any true surprises.

  • The FOMC voted in favor of raising the target range for the fed funds rate by 25 basis points to 1.25% to 1.50%
  • It was noted that the labor market continued to strengthen and that economic activity has been rising at a solid rate despite the hurricane-related disruptions in the third quarter; and
  • Chicago Fed President Evans and Minneapolis Fed President Kashkari -- the FOMC's two most dovish members -- dissented, saying they preferred to keep the target range for the fed funds rate unchanged.
The most salient item in the directive, though, was the observation that overall inflation and core inflation have declined this year and are running below 2.0%.

The latter isn't news to economists and market watchers. What has made news on the inflation front is the understanding that the Fed's so-called "dot plot" was left unchanged with a projection for three rate hikes in 2018.

Holding the rate-hike line on the dot plot is a tacit acknowledgment of Fed members' concerns about the persistence of low inflation despite the pickup in economic activity.

On a related note, the central tendency projection for real GDP growth in 2018 was raised from a range of 2.0% to 2.3% to 2.2% to 2.6% while the projection for PCE inflation was lowered from 1.8% to 2.0% to 1.7% to 1.9%. The median estimate for 2018 real GDP growth, meanwhile, was bumped from 2.1% to 2.5% while the median estimate for PCE inflation was left unchanged at 1.9%.

If nothing else, the balance of information provided by the Fed in its directive and its projections, as well as Fed Chair Yellen's acknowledgment that there is nothing flashing red, or possibly orange, for financial system risks, suggests the Fed is inclined to stick to a path of gradual rate hikes. That is an important consideration knowing that Fed Governor Powell (soon-to-be Fed Chairman Powell) was part of the forecasting and decision-making processes.

Something else that jumps out in the Fed's growth projections is that they don't live up to the Trump Administration's more optimistic projections for sustained 3.0%+ real GDP growth. In fact, the upper end of the central tendency projections for the change in real GDP for 2018, 2019, and 2020 doesn't exceed 2.6% and the longer-run central tendency projection is just 1.8% to 1.9%.

If the economy lives up to the Trump Administration's expectations, then the Federal Reserve would presumably have to be far more aggressive with its monetary policy than its own projections currently convey. Conversely, if the economy performs in-line with the Fed's expectations, then the ability to pay for the GOP tax cut plan without adding to the deficit would seemingly be compromised.

Time will ultimately tell who has it right -- or wrong for that matter -- and monetary policy will be adjusted accordingly.

The adjustment today, however, was expected. The Fed's projections, though, were perhaps not as hawkish as expected; hence, there has been a weakening in the dollar, a strengthening in the Treasury market, and little disruption for the stock market in the immediate wake of their release.

--Patrick J. O'Hare, Briefing.com

Copyright © 2008 Briefing.com, Inc. All rights reserved.
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