The greenback got dumped, as a result of a series events happened over the past day. Defeat of GOP Roy Moore in the Alabama Senate race and the miss of the core CPI were followed by a final version of tax bill. The day culminated in the conclusion of the FOMC announcement, which saw a 25 bps rate hike as expected, but with two dissents. US dollar fell against major currencies with the DXY index losing -0.71% for the day. Treasuries firmed, sending yields higher with the 2-year and 10-year yields dropping -4 points and -5 points respectively.

Alabama Senate Race

Democrat Doug Jones surprising won the Alamaba special election with 671 151 votes (49.9%), defeating GOP Roy Moore with just about 20K votes. This is the first time that Republican lost the seat in the state in 25 years. The outcome has further shrunk the Republican’s slim majority in the Senate to only two votes. The Democrat has urged the Senate majority leader to delay the vote of tax bill until after Jones has worn in.

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Final Tax Bill

On the other hand, the House and Senate leaders have eventually agreed on the final version of the tax plan. It is reported that the controversial corporate tax rate would be lowered to 21%, compared with 20% preliminarily proposed. Yet, the reduction would take effect in 2018, compared with Senate’s proposal of 2019. Meanwhile, the top income tax rate would fall to 35% from 39.5%. It is unlikely that the Republican would agree to delay the vote as the Democrat requested. The final bill would be voted in the House and Senate next week.

Core CPI Missed Expectations

Headline CPI steadied at +2.2% y/y in November. While this came in line with expectations, the core reading surprisingly missed consensus (of +1.8%) and eased to +1.7% y/y, from +1.8% in October. Inflation outlook remained positive, though with both a three-month and six-month rate at +1.9%.

FOMC Announcement

The November inflation data did not affect the Fed’s monetary decision. Policymakers, as expected, hiked to policy rate, by +25 bps, to the 1.25-1.5% range in December. However, the decision was made with Neel Kashkari and Charles Evans (both are doves) dissenting. The fed also upgraded the economic outlook, raising GDP growth forecasts and lowering the unemployment rate for the next year. Inflation would likely stay below the +2% target for the coming year. Note that the Fed has incorporated the impacts of the tax reform bill in its forecasts. Meanwhile the median dot plot continued to project three rate hikes next year but just over two in 2019.

There were a few changes in the accompanying statement. For instance, policymakers reiterated that core inflation’declined this year’ and ‘running below 2%’, but removed the language of ‘remained soft’. On the job market, they noted that it would remain ‘strong’, compared with previous description of ‘some further strengthening’ in the labor market condition. This might imply reduced need for tightening.

On the updated economic projections, GDP growth was revised higher to +2.5% in 2017, +2.5% in 2018 and +2.1% in 2019, from +2.4%, +2.1% and +2% respectively. The longer-term forecast stayed unchanged at +1.8%. Unemployment rate was revised lower to 4.1% in 2017, 3.9% in 2018 and 2019, and 4% in 2020, from 4.3%, 4.1% and 4.2%, respectively. The longer-term unemployment rate stayed unchanged at 4.6%. On inflation, the PCE inflation stayed unchanged all over the Fed’s forecast horizon, at 1.9%, 2%, 2% and 2% in 2018, 2019, 2020 and the longer run respectively.

The decision to raise the policy rate was again not unanimous. Kashkari’s dissent was expected as he also dissented against a rate hike in June. Evans, however, was not used to dissenting despite his usual dovish stance. Yet, both voted for the last time as the regional Presidents rotate next year. The new composition of the FOMC voting members remains uncertain. This is certainly something that one should pay attention to.

On the monetary policy outlook, the median dot plot projects three rate hikes next year and just over two in 2019. The 2020 projection edged higher by almost 1 more increase, while most participants forecast the terminal rate to exceed the neutral rate.


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