On the December FOMC
Today’s 25 basis point hike leaves the real funds rate 15 basis points lower than a year ago, at lift-off. With inflation higher and unemployment lower over 2016, policy is arguably easier now. The freak-out in markets about the slight uptick in the “dots” representing the forward rate path is misplaced. Yellen explicitly noted that participants are expecting “fiscal policy” that will point to a higher neutral interest rate – a higher funds rate in relation to that would not be a tightening, but rather only a tracking exercise. We think the Fed is now targeting the real neutral interest rate. Yellen and Fischer have both talked about “running a ‘high-pressure’ economy” as a means of influencing it higher. Yellen walked that back a bit today, but then walked back her walk-back. We are convinced that the Fed will do nothing to take the punchbowl away as Trumponomics takes hold.