Fed Hikes Rates For First Time In 2016, Increases Pace Of Rate 'Normalization' Forecast

With 100% chance of at least a 25bps hike (and 10% chance of 50bps), this was perhaps the most 'priced in' of any Fed meeting ever. Of course, it is not whether the Fed hikes or not at a given meeting that matters, but rather what kind of overall hiking cycle it communicates, and so attention is focused on changes to the 'dot-plot'. No surprise here: FED RAISES RATES BY 25 BPS, REPEATS GRADUAL POLICY PATH PLAN, but the forecast is more hawkish: FED OFFICIALS SEE THREE 2017 RATE HIKES VS TWO IN SEPT. DOTS. Of course now all eyes will be on Donald Trump's Twitter account for any response.

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December meeting rate expectqation are now:

  • *FED MEDIAN EST. FOR LONGER-RUN FUNDS RATE 3% VS 2.9% IN SEPT.
  • *FED: MEDIAN FEDERAL FUNDS EST. 2.1% END-2018 VS 1.9% IN SEPT.
  • *FED: MEDIAN FEDERAL FUNDS EST. 2.9% END-2019 VS 2.6% IN SEPT.

As a reminder, these were September's Fed estimates for rate trajectory:

  • 1.125% median for 2017
  • 1.875% median for 2018
  • 2.625% median for 2019

And the market has risen towards Fed expectations in the last few weeks... (This is the September FOMC Dot Plot)

"Priced In"...

 

Since The Fed last hiked rates, Financials are the best performers, bonds are unchanged and stocks are edging out gold...

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Key changes and changes from the December statement:

  • Fed says labor mkts continued to strengthen, growth moderate
  • Fed says job gains have been solid in recent months
  • Fed says spending rising moderately, investment stayed soft
  • Fed says inflation has increased since earlier this year
  • Fed lifts rate paid on excess reserves to 0.75% vs 0.5%
  • Fed raises discount rate to 1.25% from 1.0%
  • Fed officials see three 2018 rate hikes, unch vs sept. dots
  • Fed median est. for longer-run funds rate 3% vs 2.9% in sept.
  • FOMC instructs ny fed to raise rrp rate to 0.5% vs 0.25%

Full Redline below: