Fed Rate Hike Trumped by Brightening Economic Outlook

Paul Dykewicz

The most intriguing part of the Fed’s widely expected announcement this week to raise interest rates by 0.25% may have been the U.S. central bank’s projections for an improved economy that is expected to boost job growth and inflation.

The Fed steered clear of citing the Nov. 8 election of Donald Trump as the next U.S. president as a reason for optimism about the U.S. economy but the improved outlook comes in the wake of policies he has promised to implement aimed at rebuilding America’s infrastructure, reducing regulatory burdens to spur private-sector job growth and cutting taxes to fuel additional business investment in the United States The markets have rallied since Trump’s election but the U.S. central bank, as usual, focused its comments on economic data and its latest projections, while sidestepping political minefields.

Specifically, the Fed’s Dec. 14 statement reported that job gains have been solid in recent months and the unemployment rate has declined. The latest language also differed from the November update by mentioning that the “realized and expected” labor market and inflation gains led the Federal Open Market Committee (FOMC) members to vote unanimously this week to raise the target range for the federal funds rate from 1/2% to 3/4%.

The Fed indicated that its monetary policy remains “accommodative” to support further “strengthening” in labor market conditions and a return to 2% inflation from the latest U.S. inflation rate of 1.7% through the 12 months ended November 2016.

Alan Levenson, the chief economist of Baltimore-based investment firm T. Rowe Price, said the Fed’s actions reflect that labor market and inflation are a bit closer to its goals than had been anticipated in its previous summary of economic projections. The Fed’s language also indicated that it is a bit more confident that inflation will return to 2%, he added.

Exclusive  Five Investments to Consider for Navigating Inflation and the Fed’s Rate Hikes

“Policies of the incoming Trump administration will not be reflected into the FOMC outlook until they are announced and implemented with greater clarity,” Levenson said. “I think 75 basis points of rate hikes next year is a reasonable expectation, with risks skewed toward an additional 25 basis point hike. I think the unemployment rate will end 2017 below 4.5%, and that risks to core inflation are skewed modestly to the upside of the 1.8% median forecast.

However, Levenson said the FOMC’s tolerance for core inflation above 2% is a key uncertainty in its policy outlook.

“I expect policy makers to have some patience with 2%-plus year-over-year prints,” Levenson said. “If not, it would underscore risks to a modestly quicker pace of tightening.”

Despite the Fed’s announcement about its plans to raise rates, its projected U.S. GDP growth, unemployment rate change and inflation forecasts are virtually unchanged from its November update, Levenson said.

The Fed’s statutory mandate is to foster maximum employment and price stability. To that end, the FOMC expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will improve somewhat further and inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate.

The central bank also expects that economic conditions will warrant only gradual increases in the federal funds rate, which is likely to remain 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 and incoming data.

Exclusive  The Bear Market Might Be Over

As far as the Fed’s forecast of three rate hikes in 2017, it announced a year ago that it expected to increase the interest rate four times this year and that plan never came to fruition, said Bob Carlson, the author of “The New Rules of Retirement” and the editor of the Retirement Watch investment newsletter.

The Fed’s Dec. 14 statement shows that the central bank leaders view the economy as much stronger than they did in September, Carlson said.

“Much of the change is due to the election and the response of markets to the result,” Carlson said. “It also is due to the increase in optimism registered in a number of surveys of consumers and businesses.”

The planned interest rate hikes put the “biggest risk” of the last seven years back on the table that the U.S. central bank could boost rates “too far, too fast,” Carlson said.

“I don’t think that’s a big risk now, because the markets pushed rates higher before the Fed did,” Carlson said. “But, as in the last few years, we need to watch the Fed to be sure it doesn’t raise rates faster than the markets expect going forward.”

Paul Dykewicz is the editorial director of Eagle Financial Publications, editor of Stockinvestor.com and DividendInvestor.com, a columnist for Townhall and Townhall Finance, a commentator and the author of an inspirational book,Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a Foreword by legendary football coach Lou Holtz. His next appearances to sign and dedicate copies of his book will take place Dec. 17, 12:30-2:30 pm, at Greetings and Readings, Hunt Valley Towne Centre, 118 Shawan Rd., Suit Aa, Cockeysville, MD, and the Georgetown University Bookstore in Washington, D.C., Dec. 17, 4-6 p.m., and Sunday, Dec. 18, 11 am- 5 pm. Visit Paul’s website at www.holysmokesbook.com and follow him on Twitter @PaulDykewicz.

share on:

Like This Article?
Now Get a FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE

share on:


Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader


Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor