FOMC signals hawkish outlook as it hikes

The Federal Open Market Committee (FOMC) hiked the federal funds rate today (December 14), only the second such move since rates hit rock bottom after the 2008 crisis.

After a year of many delays - when it hiked almost exactly a year ago, the Fed's median projections implied rates would hit 1.4% in 2016 - the FOMC once again voted to raise the policy rate 25 basis points, in a unanimous decision. The target range for the federal funds rate is now 0.5-0.75%.

At a press conference, Fed chair Janet Yellen emphasised low unemployment, rising inflation, and positive consumer sentiment as factors behind the decision. "The committee judged a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen towards our goals," she said.

Despite a wobble in May, employment has been steadily rising throughout the year. Inflation has similarly recovered from lows induced by the oil price shocks of late 2014, with PCE inflation hitting 1.5% in October, the highest rate for two years.

Amid encouraging signs in the economy, the FOMC has become more hawkish than when it last released projections, in September. The median projection is for rates to hit 1.4% in 2017, up from 1.1%. The committee expects inflation to reach 1.9% next year and GDP growth to rise to 2.1%, up from 2%.

The "dot plot" of expected interest rates in the next few years shifted up relative to September, but Yellen sought to downplay the movement. "I would like to emphasise this is a very modest adjustment," she said, adding that only a few members changed their forecasts.

Many journalists' questions focused on the impact of fiscal policy, now that Donald Trump is president-elect. Yellen said some FOMC members did incorporate assumptions on fiscal policy into their forecasts, but refused to comment during the press conference on how the Fed might respond to future fiscal policies. "It is far too early to tell how these policies will unfold," she said.

Nevertheless, Yellen did hint that Trump's plans for fiscal stimulus could overheat the economy. "I would say at this point fiscal policy is not obviously needed to get back to full employment, but, nevertheless, let me be clear that I am not trying to provide advice to the new administration," she said.