US Fed raised its FFR by 25bps, turned slightly hawkish

US Fed projected three rate hikes for 2017, compared to prior two hikes

As widely expected, the US Federal Reserve (US Fed) decided to raise its target range for the federal funds rate (FFR) by 25bps to 0.50-0.75% in the final Federal Open Market Committee (FOMC) meeting of 2016. US Fed cited “inflation has increased since earlier this year”, and also added that “market-based measures of inflation compensation have moved up considerably.” With a slightly more hawkish FOMC statement, the US Fed guided that the pace of increase in FFR for long-term expectations have been revised higher, especially for 2017. From the previous assumption on the dot plots analysis, the two rate hikes projected for 2017 has now been increased to three hikes in the latest assessment, see Fig 1. Nevertheless, the FFR is likely to remain, for some time, below levels that are expected to prevail in the longer run. The median estimate in the latest (December) dot plots shows that the FOMC members expect FFR to range between 1.25-1.50% in 2017 and possibly another three rate hikes to 2.0-2.25% in 2018.

In the latest FOMC Summary of Economic Projection, the GDP forecast has been revised slightly higher to a range of between 1.9-2.3%, from earlier forecast of 1.9-2.2% for 2017. However, the US Fed also raised its forecast for personal consumption expenditures (PCE), revising higher to a range of between 1.7-2.0% from its previous forecast of 1.7-1.9%.

Despite the latest rate hike, the US Fed continues to see that “the stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2% inflation.” On the macro front, US job gains have been solid in recent months and the unemployment rate has declined, where the latest non-farm payrolls rose by 178k and unemployment rate fell to 4.6%, the lowest since August 2007.

Source: Affin Hwang Research - 15 Dec 2016