The Fed’s final meeting of the year was its most anticipated. Market volatility, growth concerns, and limited inflationary pressure have investors wondering whether today’s rate hike might be the last this cycle (a dramatic shift from early-October when markets were pricing in two rate increases in 2019). The updated policy statement and projections certainly leaned dovish but hardly validated market pessimism. There was some speculation that the FOMC might drop their forward guidance in favour of data dependence, but they still indicated “some” further rate increases should be expected. However, that came with an added dose of caution—risks to the outlook are roughly balanced but the Fed will be monitoring “global economic and financial developments” and how they impact the economic outlook.

The FOMC trimmed their median GDP growth forecast for 2019 (to 2.3% from 2.5% previously) due in part to recent tightening in financial conditions. Core inflation is expected to be steady at 2%, even with unemployment remaining well below its longer run rate (which was revised down slightly). The upshot is a slightly shallower tightening path—the dot plot median now points to two rate hikes in 2019 (previously three) and just one increase in 2020. The longer run ‘neutral’ rate was trimmed to 2.75% from 3%. Overall, a more dovish set of projections challenges our forecast for once-a-quarter rate increases to continue next year.

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