A dovish hike from the Federal Reserve

The US Federal Reserve (Fed) raised the target range for the federal funds rate by 25 basis points (bps) to 1.25-1.5%, as had been widely expected.

Forecasts for growth in 2018 were revised up to 2.5% (previously 2.1%) whilst the unemployment rate is expected to decline to 3.9% (previously 4.1%). The upward revision to growth largely reflects the boost from the tax package.

However, this has been seen as a "dovish" hike as the central bank did not raise its expectations for the path of interest rates: the dot plot was largely unchanged with three 25 bps hikes next year and two in 2019.

Subdued inflation still a concern

Against a backdrop of stronger growth expectations this would seem to reflect ongoing concerns about subdued inflation.

Fed forecasts for inflation were unchanged at 1.9% indicating that the policymakers believe that the Phillips curve will stay flat despite the jobless rate falling to its lowest levels for seventeen years.

The latest CPI figures showed that core inflation came in below expectations in November, strengthening the hand of the inflation doves.

March hike still anticipated

We continue to look for a pick-up in inflation as the recovery in activity feeds through to prices in 2018 and expect the Fed to hike rates again in March.

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