Fed Note 12-14-2016
The probabilities of the Fed taking action at this December meeting were quite high (in the range of 95-100%), and the FOMC didn’t disappoint, raising the target Fed Funds rate to 0.50-0.75%. With strengthening economic data, or at least not weak enough to not proceed, this has been a foregone conclusion for several weeks. There were no dissenting votes at this meeting.
The official statement noted that the economy has been expanding at a ‘moderate’ pace, with gains in labor and household spending, while business fixed investments has remained soft. Inflation increases were also noted, despite levels remaining below the Fed’s target; however, levels are expected to rise as energy price effects trail off and labor improvement finds its way in. Estimates for the ‘dot plot’ of economic growth and inflation both saw slight increases, to the point where three additional rate hikes are implied in 2017; longer-term estimates beyond the next year or two are similarly little changed.
In looking at the mandate dashboard:
Economic growth: The Trump election victory has raised expectations for fiscal spending and stronger sentiment due to plans for lower corporate and personal taxes and a generally more ‘business-friendly’ environment, which includes the potential for a loosening of regulations. This scenario could help push further business capex spending, which is one key area that’s been significantly lacking in this recovery. While the impact of a single election is usually limited, the unleashed ‘animal spirits’ could perpetuate a snowball effect of stronger confidence and spending, which can turn into tangible economic growth effects. At the same time, even policy changes and improved sentiment can’t perform miracles by turning the tide of a secular slower growth tide globally, led by demographics in many cases and fewer ‘easy gains’ from larger developing nations like China, as these evolve into more complex economies.
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