- The Fed hiked rates in December, after a brief pause.
- I see inflation and wages likely to strengthen next year.
- That helps pave the way for further rate increases in 2018.
The Federal Reserve has raised rates in its December monetary policy meeting for the fifth time since 2015, increasing the federal funds rate to between 1.25% and 1.5%. This move was widely anticipated by the market, as the Fed has been communicating a lean in this direction for the last several months.
As we look to 2018, I think the Fed will continue to hike rates gradually, at the pace of roughly once each quarter, if the economy continues to run smoothly, inflation remains near its 2% target and equity markets don’t have a major downturn. Markets are currently pricing in two hikes for 2018. That seems like a reasonable expectation, looking at the bigger picture, as markets put a little under 50% probability that a negative event such as an equity market sell-off or an economic slowdown could slow down the Fed’s pace.
While this is our baseline Fed forecast, there is still a lot we will be watching. There are currently three vacancies on the Federal Reserve Board of Governors, including the vice chair seat. In addition, Bill Dudley will retire as president of the New York Fed next year, and his replacement has yet to be announced. While incoming Chair Jerome Powell represents a likely continuation of the status quo, all of the turnover does present the potential for some uncertainty. We will be closely watching for appointment announcements and appointee speeches to get a sense of how Fed policy might shift.
Assuming that new Fed members don’t instigate any major changes of direction, my outlook is informed by two key metrics that correspond to the Fed’s dual mandate: employment and inflation.