Thursday, December 15, 2016

Fed: I'll See Your 'Tiny' Hike And Raise You A 'Tiny' Hike

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*Fed surprised markets by doing something they said they wouldn't do. They raised their rate targets for next year.

*Before today Fed officials have said they need to see fiscal plans before they update their monetary policy.

*The Fed's press conference slipped out an important change from Fed Chair Yellen that they raised their targets partly based on 'site unseen' fiscal policy.

Markets knew the Fed would raise their key rate yesterday. We even thought they could raise some of their economic expectations. But their raising the number of hikes next year due in part to unknown fiscal policy was as negative a surprise as you can get from a pretty steady-handed Fed. We'd guess foreign markets don't like that because they are trying to ease. That could ultimately affect US markets.
Change in Fed Funds Targets For 2017 A Surprise
In the adjunct disclosure to their famous release the Fed periodically gives their annual targets. The Fed raised their GDP assumptions by .1% for 2017. No biggie. They lowered their unemployment rate expectations for 2017 by .1%. No biggie. They did not change their inflation target for 2017.
But they increased their Fed Funds target from 1.1% to 1.4%. Instead of two rate hikes next year they now expect three.
The Fed constantly says their targets are always wrong but the change in rate assumptions was a surprise. To markets it was a negative surprise.

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