True to form, the FOMC was loath to reveal their cards in their December meeting minutes.
When they announced a surprise increase to their forecast of rate hikes in 2017, investors took this as a sign that the Fed expected the new president elect to deliver fiscal stimulus and tax cuts that catalyze growth. Many central banks have cited the need for fiscal policy to underpin their efforts in monetary policy over the last year, and Trump has promised to deliver just that. The current Fed is as apolitical as they come, making it hard to marry their impartiality with any expectations from a new political regime.
The FOMC minutes did indeed cite recent changes, but as always, sifting through the minutes is an exercise in temperance. Much of the Fed’s outlook remains unmoved from their pre-election stance; however, there was a clear recognition of the potential changes to the fiscal landscape. According to the minutes, “almost all” FOMC participants are accounting for upside risks to growth in light of these prospective policies. The important distinction however, is that these are upside risks – not a higher forecast for real GDP growth. Their hard forecast for growth was only “slightly higher” in the long run. Their view is that the headwinds of fiscal spending are “substantially counterbalanced” by their anticipation of a stronger dollar and upward trajectory of long-term interest rates.
The Fed remains accommodative, signaling their willingness to increase the pace of interest rate hikes as needed to respond to expansionary fiscal policy without committing to action at this time. Overall, the committee considers it too early to determine how the election will influence the economy and ultimately monetary policy. With much uncertainty over the shape and nature of the policies Donald Trump will deliver, the Fed will remain reactionary for now.
Natalie Ciavarella is a Corporate Dealer at World First USA, Inc.
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