• FED hikes rates for the third time this year as it was widely anticipated
  • FOMC members still forecast three hikes to take place in next year
  • US dollar little changed after all, trimming its knee-jerk slump

As per market expectations the Federal Reserve decided to pull the trigger once again this year delivering the third rate increase in 2017. The US dollar slumped immediately after the release, however declines were quickly wiped off. Below we present the most important headlines from the statement:

  • median estimates show three hikes in 2018, two in 2019
  • FED removes explicit November reference to soft core inflation
  • FED sees moderate growth, labour market remaining ’strong’ (not further improvement forecast here)
  • inflation forecasts left unchanged compared to September
  • near-term risks are to be roughly balanced (nothing new on this topic)
  • FED raises the discount rate by 25 bps to 2%
  • Evans and Kashkari dissent in favour of a no rate change
  • monthly balance sheet run-ff to rise to $20 billion in January as planned

On the surface the statement could be viewed as widely balanced, however a shift with regard to the labour market could point that the FED seems to agree that full employment is getting closer. On the other hand the Federal Reserve chose to leave inflation forecasts unchanged (both PCE and core PCE) admitting again that lack of price growth could be somewhat cryptic. Finally, the projections as to the jobless rate were lowered to 3.9% from 4.1% for 2018 and 2019 whereas the forecast for 2020 was reduced from 4.2% to 4%, the longer run jobless rate was unchanged at 4.6%.

link do file download linkThe FED still sees three more hikes in 2018 and two in 2019 while the longer-term rate is constantly at 2.8%. Source: Federal Reserve

As you can see above the FED uninterruptedly flags three more interest rate increases in the following year which is in line with the view outlined in September. The neutral rate is still seen at 2.8% meaning the same trajectory of rate rises. After the decision OIS-implied odds for a hike in March stand at 68% while a June’s hike is almost fully priced in.

link do file download linkThe EURUSD moves higher on the back of the FED decision, however gains have not been impressive thus far. Notice that the US 10Y yield keeps moving close to its daily lows nevertheless it’s already dipped earlier in the day. Given a technical view one could assume that a bounce in the EURUSD could be anticipated as bears have failed to break through 1.1730 as of yet. Source: xStation5