As widely expected, this week’s two-day FOMC meeting resulted in the first rate hike of the year on Wednesday – a quarter-point rise up to 0.75%-1.00%.
Despite expectations of a potentially faster pace of tightening going forward, the Fed’s ‘dot plot’ outlook for the path of rate hikes in 2017 was essentially unchanged, with the median projection remaining at three quarter-point increases in 2017, which includes today’s hike.
In raising rates, the Fed cited a strengthening labor market, expanding economic activity, and rising inflation that is ‘moving close to the Committee’s 2 percent longer-run objective.’
The FOMC statement and subsequent press conference did not refer to any timeline for balance sheet reduction. Rather, the statement asserted that its current policy with regard to reinvestments will be maintained "until normalization of the level of the federal funds rate is well under way."
As to the outlook for monetary policy tightening going forward, the Fed retained its longstanding statements that interest rate increases will be ‘gradual’ and that policy ‘remains accommodative.’
The rate hike itself was already well-expected and priced-in to the markets. However, many market participants had been expecting a significantly more hawkish outlook from the Fed, with perhaps some indication of an accelerated pace of tightening.
Due to the Fed’s somewhat dovish tones despite its more upbeat view of the economy, the market reactions to the statement and press conference were both swift and dramatic. The US dollar plunged while gold surged sharply. US stocks shot up, with the S&P 500 gaining over 1% at one point to approach its all-time high once again, while the Dow rose by well over 100 points. These reactions continued and extended during and after the press conference.
While the severe, knee-jerk market reactions to the Fed’s dovish-leaning statements may have been warranted given expectations of a more aggressive stance, these sharp market moves may well have been overdone. This should especially be the case given that the Fed is still expected to embark on a steady pace of rate increases for the next few years, at least, and that the Fed could quickly become more hawkish if or when the Trump Administration begins to implement its planned fiscal policies. In the case of the dollar and gold, therefore, impending counter-moves that pare or reverse the powerful post-FOMC reactions could well be expected in coming days.