FOMC Hikes Rates As Expected: Expects 3 Hikes, Faster Growth As Two Dissent

With a 98.3% probability heading in, there was really no doubt the most-telegraphed rate-hike ever would occur, but all eyes are on the dots (rate trajectory shows 3 hikes in 2018), inflation outlook (unchanged), and growth outlook (faster growth in 2018), and lowered unemployment outlook to below 4%. The Fed also plans to increase its balance sheet run off to $20 billion in January.

*FED RAISES RATES BY QUARTER POINT, STILL SEES THREE 2018 HIKES
*FED SEES FASTER 2018 GROWTH, LABOR MARKET STAYING `STRONG'
*FED: MONTHLY B/SHEET RUNOFF TO RISE TO $20B IN JAN. AS PLANNED

The dissents by Evans and Kashkari are significant as they send the signal that there is a significant fraction of the FOMC that would like to put off additional rate hikes until inflation is moving back closer to 2%. You could expect additional dissents in March if the FOMC goes ahead with a hike then, unless inflation rebounds by then.

On the other hand, the median target "dot" for 2020 rose to 3.063% vs 2.875% in September; suggesting even further tightening in store.

The Fed's forecasts improved for growth and unemployment, while keeping inflation unchanged:

The Dot Plot shows a slightly more hawkish bias to rate trajectory…

*FED MEDIAN SHOWS FUNDS RATE 3.1% AT END-2020 VS 2.9% IN SEPT.
*FED LEAVES ESTIMATE OF LONGER-RUN FUNDS RATE AT 2.8%

Comparing the Sept and Dec dots we see the following median rate forecasts:

2017 1.375% (range 1.125% to 1.375%); prior 1.375%
2018 2.125% (range 1.125% to 2.625%); prior 2.125%
2019 2.688% (range 1.375% to 3.625%); prior 2.688%
2020 3.063% (range 1.125% to 4.125%); prior 2.875%
Longer Run 2.75% (range 2.250% to 3.000%); prior 2.75%

As for the projection interval, the forecast ranges narrow for 2018, 2019 and longer-run; widens for 2020:

2018 range 1.125%-2.625% vs 1.125%-2.725% in September
2019 range 1.375%-3.625% vs 1.125%-3.375% in September
2020 range 1.125%-4.125% vs 1.125%-3.875% in September
Long-run range 2.25%-3% vs 2.25%-3.5% in September

More specifically, while now two FOMC members expect the fed funds to rise above 4% in 2020, the 3.5% Long Term "dot" is now gone as the lone "long-term" optimist has disappeared.

Notably, as Bloomberg points out, the dot plot implies that a growing number of Fed officials think policy will need to be restrictive in 2020 – presumably to tamp down on inflation risks amid an overheating economy. Eight 2020 dots are above even the highest estimates of the long-run dot.

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Was there any doubt?