Fed delivered the widely expected hike - BBH

Research Team at BBH notes that the US Federal Reserve delivered the widely expected hike yesterday. 

Key Quotes

“A year ago, it suggested four hikes in 2016 were likely appropriate.  The market never accepted that, and as the year progressed many derided it.  Yesterday the Federal Reserve's projections anticipated three hikes next year instead of the two that were anticipated in September.”

“The distribution of the forecasts illustrates what happened.  In September, 7 of the 17 members expected Fed funds would finish 2017 in the 1.25%-1.50% range or higher.  Yesterday, 11 did.  In September, 10 members expected that Fed funds would finish 2017 in the 1.0%-1.25% range or lower.  Now 6 do.”

“Yellen made two important points that ought not to be lost.  First, she noted that the change in the median forecast was small and was the result of a few members changing their forecasts.  Second, and arguably more important, some (but not all) of the participants incorporated changes in fiscal policy.  This gives meaning to the old saw about a camel being a horse made in committee.  We did not anticipate a change in forecasts based on fiscal policy that is impossible to make judgments on yet.”

“What changed in the market's reaction function is that the rise in US rates was an adjustment in the real rate.  That is to say that it appears that inflation expectations did not change.  Here we measure inflation expectations by the 10-year breakeven rate (inflation-linked bond yield vs. the conventional bond yield).  For example, the 10-year US yield is up 14 bp on the week while the 10-year break-even is down three basis points this week.”