The FOMC increased the federal funds rate to 1.50% from 1.25%, no surprise with everyone expecting it. Two Fed FOMC members voted against the increase; Evans of Chicago and Kashkari of Minneapolis. Interpreting the statement market’s initial reaction was that the Fed will move three times in 2018 as was widely believed; a word of caution, however, it isn’t a sure thing yet and is dependent on economic improvement and some belief inflation is moving up. Nevertheless, that is the consensus momentarily. Bank Prime rate now 4.50% now.
- Household spending has been expanding at a moderate rate,
- On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent.
- Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.
- Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy.
- The Committee continues to expect that, with gradual adjustments in the stance of monetary policy,
- The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
Yellen’s last press conference at 2:30 AM ET began with the bellwether 10 yr at 2.37% -3 bps and MBS prices +22 bps on the session. By the time she finished the 10 2.35% and MBS prices +30 bps. On Bitcoin question, she danced around it on questions of what the Fed thinks. Her comment was the Fed will monitor banks closely in use of any bitcoins, and she leaned on its use as a money laundering vehicle. She commented that central banks may be looking to their own digital currencies but also made a point that the Federal Reserve is not yet seriously thinking about it; calling bitcoin an unstable market. She also warned of the increasing US debt level.
Also in conjunction with the meeting the Fed released its quarterly forecasts: Tomorrow a number of key data points; Nov retail sales expected +0.3% but when auto sales are removed sales up 0.7%; the control group up 0.4%. Nov export and import prices (import prices +0.7%, export prices +0.3%. Weekly claims +3K to 239K. Oct business inventories -0.1% estimate That would be a negative for Q4 GDP growth when the Atlanta Fed GDPNow is updated.
Congressional Republicans have reached a deal on final tax legislation, the top Senate Republican tax writer said, with President Donald Trump saying minutes later he would back a corporate tax rate of 21% from 20% he wanted, a minor concession. A top individual income tax rate of 37%, down from the current 39.6% level; and a $10,000 cap on deducting state and local property or income tax payments. Senate Finance Committee Chairman Orrin Hatch said a final vote could begin in the Senate as early as Monday. The budget deficit caused by the tax cuts will add about $1.4 trillion to the federal deficit over 10 years. The current deficit is $20 trillion; if recent history holds the deficit in 10 yrs will exceed $28 trillion. Moody’s Analytics Chief Economist Mark Zandi said the Republican bill, if enacted, would cause interest rates to rise, meaning the benefits of a lower corporate tax rate would be “completely washed out.” (If that becomes reality the stock market will have problems; a lot of the recent increases due to the coming corporate tax cut). Republican Senator Bob Corker also added his continued worries over the increasing deficits.
Like clockwork…again. The 10 yr briefly increased to 2.42% in very early trade this morning but as it did two weeks ago dropped back to 2.40% then this afternoon the yield continued to decline on the lack of inflation noted by the FOMC and the Fed’s quarterly forecasts (see above). At 2.35% the 10 is likely to move to 2.32% where it has been stopped since the end of Sept (a couple of breaches but were quickly reversed.