Key takeaways from Federal Reserve's December policy meet

The US Federal Reserve, in a widely expected move, raised interest rates by 25 basis points (bps) to a range of 1.25-1.50% in its December monetary policy meeting that concluded on Wednesday. 

The Fed maintained accommodative stance and raised its growth forecast for 2018, but flagged concerns about inflation, tempering expectations for future tightening.

This was the third rate hike this year with the Fed sticking to its projection for three rate increases next year, while keeping a close look at inflation data.

"Federal Reserve officials did just what the street expected; they chose to increase interest-rates and raised their forecast for economic growth in 2018. The projection for three hikes in the coming year remains intact," said brokerage IIFL in a report. 

1) Impact of tax overhaul on growth

The Fed policymakers projected a short-term jump in US economic growth from the Donald Trump administration’s proposed tax cuts. The central bank revised its growth forecast for 2018 to 2.5% in 2018, up from the 2.1% forecast in September. The pace of growth is expected to cool to 2.1% in 2019, slightly higher than the prior forecast of 2%.

"Changes in tax policy will likely provide some lift to economic activity in coming years," Fed Chief Janet Yellen said. Adding: "the magnitude and timing of the macroeconomic effects of any tax package remain uncertain."

The impact would mainly work to raise aggregate demand as households and companies have more money to spend, Yellen said, with some potential to raise investment and the economy’s longer-term growth.

2) Inflation concerns 

In a press conference following the release of FOMC statement, Yellen said the persistent shortfall of inflation from the Fed’s 2% goal was the major piece of “undone work” she was leaving for her successor Jerome Powell to figure out.

"Inflation on a 12 month basis is expected to remain somewhat below 2% in the near term but to stabilise around the Committee's 2% objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely," said Fed in its policy statement. 

3) Future rate hike path

The Fed’s forecast of three additional rate increases in 2018 and 2019 was unchanged from its projections in September. The central bank sees no reason to increase the pace of rate hikes, going ahead.  

"The Committee expects economic conditions to 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data," said Federal Open Market Committee (FOMC) statement.

4) On balance sheet reduction plans

The Fed remained consistent with its balance sheet reduction plan. It said that, as of January, it would raise the amount of Treasury bonds and mortgage-backed securities that it would not reinvest on a monthly basis to $12 billion and $8 billion, respectively.

(With inputs from Reuters) 

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