U.S.: Fed a bit more hawkish, other data disappointing

Weekly Export Risk Outlook

As expected, the Federal Reserve raised its policy Fed Funds rate by 25 basis points (bps) to a range of 50-75 bps – still a very low rate historically. More importantly the Fed indicated it would hike rates three times (at 25 bps each) in 2017 as opposed to the previous meeting when it projected just two hikes. We maintain our forecast that the Fed will hike two or three times in 2017. The Fed’s moderately more hawkish stance was reinforced by the accompanying statement which noted “Market-based measures of inflation compensation have moved up considerably…”

Those measures include the 5 year TIP spread which has risen from 157 bps the day before the election to 200 bps currently, and the yield on the ten year Treasury note which had risen from 188 bps the day before the election to almost 260 bps currently. The Fed is also projecting three hikes in both 2018 and 2019, putting the Fed Funds rate at 2.9% by the end of 2019, approximately the same as its estimate for the long term rate of 3.0%. In other news, retail sales and industrial production both disappointed, inflation crept up, and in Canada, housing prices rose only +0.2% m/m, the slowest this year.

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