Fed rises rates as expected, three hikes signaled for 2017 - ING

According to Rob Carnell,  Chief International Economist at ING the big note from today’s Federal Reserve decision to hike rates by 25bp is that it signaled three rate hikes for 2017, up from the previous guidance that pointed to 2 hikes. 

Key Quotes: 

“The big takeaway from this meeting was the increase in the pace of tightening signalled for 2017. Where 2 rate hikes of 25bp were signalled in the previous guidance, there are now three hikes signalled. Despite this, the other forecast variables are little changed.”

“Probably most noteworthy is the small 0.1pp increase in 2017 GDP growth, now expected to be 2.1%, but no further increase is expected in 2018, which is unchanged at 2.0%.  The 2019 GDP forecast is also only slightly higher at 1.9% (1.8% previously). There is not much concession in these growth forecasts to expectations of big fiscal stimulus from a Trump administration and our own forecasts are considerably higher – closer to 3% in both years.”

“In contrast, PCE inflation forecasts are unchanged at 1.9% in 2017 and 2.0% in 2018. This is a bit odd, as the accompanying statement makes a big deal of rising inflation expectations (market based), which are described as having risen ‘considerably’.”

“This is a peculiarly hawkish set of forecasts, against a not particularly hawkish statement, with the one exception of the market based inflation expectations.”

“It is worth bearing in mind that the Fed has forecast significant tightening before, only for events to overtake them, and for them to deliver very little. We don’t rule that out this time either. There are a lot of things that can still “go wrong”, including the European political calendar, and delivery of stimulus taking longer, and delivering less than currently expected.”