Market reaction to the Dec FOMC meeting - Westpac

Analysts at Westpac notes that the Fed finally delivered a second +25bp hike for this cycle, a year after initial lift off and lists down the market reaction to the Dec FOMC meeting.

Key Quotes

“There is a clear hawkish bias to the dot plot. The median calls for 3 hikes in 2017, up from 2 as of the Sep FOMC, taking the Fed 2017 dot plot back to where it stood as of the June 2016 meeting. There were no changes to the dots in 2018 or 2019, both years showing a median of 3 hikes in each year.”

“The median terminal neutral rate rose to 3.00%, up from 2.875%.”

“The 2017 median for 2 hikes was never particularly sturdy - if just 2 forecasters among the 7 at the median penciled in an extra hike the median was going to rise to 3 hikes. In the event 3 forecasters among that group of 7 turned more optimistic. Going forward the 2017 median now looks a lot more secure. There are 6 officials at the median calling for 3 hikes next year and we’d need to see a majority of at least 4 turn more optimistic to push that median higher still.”

“The committee says that the labour market has “continued to strengthen” (no change) and that activity has been growing “moderately”.”

“The inflation commentary betrays a more confident Fed, the committee noting "Inflation has increased", vs "Inflation has increased somewhat" and they now note that inflation expectations have “moved up considerably” , the Fed adding "considerably", though it is caveated with the observation that they, “are still low”. Elsewhere risks are still seen "roughly balanced" (no change), there were no dissents and the guidance still calls for "gradual" rate increases.”

“The USD should remain well supported into year’s end. As bund-Tsy and JGB-Tsy spreads continue to push in the USD’s favour the USD index likely takes out recent highs just above 102. Markets are now pricing in 57bp in Fed hikes for end-2017, up from 40bp ahead of this meeting. That is a sharp increase but still shy of the 3 hikes the Fed has penciled in  and the Fed has not yet fully factored in a potential fiscal stimulus into its projections either. The caution is that details on a fiscal package are unlikely to be forthcoming for a few weeks, probably Trump’s 20 Jan 2017 inauguration and our US data surprise index is very extended, today’s cooler retail sales arguably an early signal of a trend shift on this front.”