Fed raises rates by 25 basis points, sees three hikes in 2017

The US central bank hiked the range for its main policy rate by 25 basis points to between 0.50% and 0.75% and appeared to signal that more interest rate increases were in the pipeline for 2017 than it did at its meeting in September, when it last published projections.

Rate-setters in Washington DC were unanimous in their decision to tighten policy.

Significantly, in her post-meeting press conference Fed chief Janet Yellen said there was no "obvious" case for fiscal stimulus to be applied now.

Did the Fed raise its rate hike projections?

According to the newly-submitted, and sometimes controversial, 'dot-plot' graphs of interest rates projections from the Federal Reserve´s board members and regional Fed presidents, the median expectation now was for three quarter-point interest rate hikes in the following year, up from two beforehand.

A further three hikes were projected in 2018, followed by another three in 2019, the graphs showed.

Similarly, the median projection for the Fed funds rate in 2017, which was contained in a separate table of the Summary of Economic Projections, rose from 1.1% to 1.4%, the Fed said.

However, the so-called 'central tendency' of rate-setters´ interest rate hike projections for 2017 to 2019 had in fact come down relative to September; standing at between 1.1% and 1.6% for 2017 versus between 1.1% and 1.8% before.

In parallel, the Federal Reserve raised the discount rate by 25 basis points to 1.25%, as asked for by eleven of the twelve regional Fed banks.

In its policy statement, the Federal Open Market Committee said the jobs market had continued to strengthen and the economy to expand moderately.

Market-based measures of inflation compensation had "moved up considerably", the FOMC said, although the latter were still "low".

Survey-based measures, on the other hand, were "little changed" in recent months.

The Committee also reiterated that it was continuing to monitor inflation indicators and economic and financial developments globally.

"Near-term risks to the economic outlook appear roughly balanced," it added.

By way of an immediate reaction, the yield on the benchmark 10-year US Treasury note was moving higher by two basis points to 2.42%, versus a three basis point drop beforehand.

The yield on the two-year note was up by four basis points to 1.21%.

Over in currency markets, dollar/yen was jumping 0.67% to 115.96.

Economists a tad divided, Fed funds futures see even odds of three hikes in 2017

Commenting on the Fed´s decision, Rob Martin and Michael Gapen at Barclays Research said: "In the summary of economic projections, the SEP, the median member believes that three rate hikes in 2017 is likely appropriate. We had anticipated that remaining at a two rate hike median would be a close call. However, that 11 of the 17 members thought there should be three hikes or more is quite a bit more hawkish than we had expected.

"[...] In our view, the slowdown in growth early in the year associated with tariffs would preclude an early year rate hike. Likewise, if the administration enacts a large tax and spending bill that substantively boosts activity and inflation, subsequent dot charts could show a much steeper path of policy hikes."

For his part, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "The bump up in the rate hike projection for next year, then, is a response to the latest decline in unemployment and the apparent pick-up in growth since mid-year. We're slightly surprised to see it, but it is a welcome development, in our view. We remain very worried that the Fed and markets still do not fully appreciate the extent of upside inflation risk for next year via the labor market, where wage growth is on the verge of a rapid acceleration. The March meeting will be very interesting, to say the least, if Congress has passed a bill cutting taxes."

As of 2030 GMT, Fed funds futures were pricing in roughly a 47% probability of three more hikes by the time of the 13 December 2017 FOMC meeting, according to the CME´s Fed Watch tool.