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Fed Hikes Rates, Sees Gradual Rate Tightening in 2017

by Don Curren | December 14, 2016

The US Federal Reserve raised its benchmark interest rate by 25 basis points today, repeating last year’s pattern of waiting until December to make its sole rate move of the year and thereby giving an early Christmas gift to Main Street savers and U.S. dollar bulls.

The Fed also struck a slightly more hawkish stance than widely expected in financial markets, prompting the U.S dollar to gain ground in the immediate aftermath of the statement. The greenback recovered earlier losses against the euro and rose about 0.4% higher against the common currency after the Fed’s statement was released.

Market watchers attributed the U.S. dollar gains to the fact the U.S. central bank’s “dot plot” of rate expectations indicated three rate hikes in 2017 rather than the two moves seen in September.

But the Fed’s eagerly awaited policy statement also indicated it will proceed cautiously in the new economic world soon to be ushered in by President-Elect Donald Trump. The Fed said its policy making Federal Open Market Committee expects that economic conditions “will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

The Fed also said it expects economic activity will expand at a moderate pace and labor market conditions will strengthen.

U.S. economic data has been fairly strong of late, but the outlook is clouded by uncertainty about the direction of economic policy under President-elect Trump.

Trump’s campaign leaned heavily toward fiscal stimulus and bolstering U.S. employment through raising tariffs and renegotiating trade agreements. Even if he doesn’t enact all of the measures he espoused, his policies are likely to rev up the U.S. economy and potentially trigger inflation.

At this point, what that policy will be and what impact it will have remain unknown, and that will likely keep the Fed sidelined in the near term despite its clear indication that further monetary tightening is on the way later in 2017.

Bottom Line: Expect the Fed to be cautious about monetary tightening in 2017

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