The Federal Reserve voted Wednesday to raise interest rates by a quarter percentage point to between 0.5% and 0.75%. Wednesday’s move was the first in 2016. Fed officials in economic projections accompanying their statement suggested it would be appropriate to raise rates three more times in 2017. Here are some early reactions from economists.
“In short, a bit more hawkish than expected because of the change in the median funds rate projection for 2017, although officials [are] continuing to emphasize that tightening will proceed gradually. Of course, ‘gradual’ is open to interpretation. Even 100 basis points per year—25 at every other meeting—would be quite gradual by past standards. And while 75 bps of tightening in 2017 could mean that the next move is not until June, it clearly raises the potential for action as soon as March, as we are forecasting. In any event, that is now the focus: Will they go again as soon as March?” –Jim O’Sullivan, chief U.S. economist, High Frequency Economics
“The forecasts appear to make no allowance for the idea that fiscal easing could substantially boost growth; that’s no surprise, given that no legislation has been passed. In other words, this statement and forecasts constitute something of a holding operation, pending action from Congress. The bump up in the rate hike projection for next year, then, is a response to the latest decline in unemployment and the apparent pick-up in growth since mid-year. We’re slightly surprised to see it, but it is a welcome development, in our view. We remain very worried that the Fed and markets still do not fully appreciate the extent of upside inflation risk for next year via the labor market, where wage growth is on the verge of a rapid acceleration. The March meeting will be very interesting, to say the least, if Congress has passed a bill cutting taxes.” – Ian Shepherdson, chief economist, Pantheon Macroeconomics
“The slightly faster than previously anticipated pace of monetary tightening in 2017 is, at first glance, hard to square with the Fed’s economic projections. The median for 2017 GDP growth was revised up trivially to 2.1%, from 2.0%, while the unemployment rate forecast was revised down trivially to 4.5%, from 4.6%. But those economic projections clearly still don’t incorporate the strong possibility of a major fiscal stimulus next year. That makes sense, since officials don’t want to be accused of political meddling. But even if it isn’t explicit in the economic projections, a few Fed officials clearly thought it made sense to raise their interest-rate projections a little. We expect the Fed to raise rates four times next year, taking the fed-funds target range to between 1.50% and 1.75% by end-2017, but we have also factored a fiscal stimulus explicitly into our forecasts and, consequently, expect GDP growth to be a stronger 2.7% in 2017.” –Paul Ashworth, chief U.S. economist, Capital Economics...MORE
Earlier at Real Time Economics:
Parsing the Fed: How the December Statement Changed from November