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Dollar bears painted the town red while bulls booked profits even after the FOMC announced a 0.25% rate hike as head honcho Yellen stayed cautious on inflation.

U.S. lawmakers were able to come up with legislation on a tax deal that would be up for final voting next week. However, Yellen clarified that this could merely lead to a short-term economic boost.

  • U.S. headline CPI up by 0.4% as expected in Nov
  • U.S. core CPI posted 0.1% uptick vs. estimated 0.2% gain
  • U.S. EIA crude oil stockpiles down by 5.1M barrels vs. 3.6M forecast
  • FOMC hiked interest rates from <1.25% to <1.50% as expected
  • FOMC members Kashkari and Evans voted to keep rates steady
  • FOMC statement: Job gains have been solid
  • Fed head Yellen: Most FOMC members factored in tax stimulus
  • Fed upgraded GDP, employment, PCE inflation estimates, core PCE unchanged for 2017

Major Events/Reports

FOMC statement

As expected, the FOMC announced a 0.25% rate hike from <1.25% to <1.50% in their December statement, even as a couple of members (Kashkari and Evans) dissented.

There were a few notable changes in their official announcement, particularly when it came to their assessment of the jobs market and inflation.

In their previous statement, the FOMC highlighted the drop in payroll employment due to the hurricanes, and this phrase was replaced with an assessment that “job gains have been solid.” 

The December statement also scrapped that bit on how core and overall inflation have been soft, simply maintaining the assessment on how both have “declined this year and are running below 2 percent.”

Policymakers also assured that the effects of the hurricanes a few months back have not materially changed their near-term outlook. The committee reiterated that “labor market conditions will remain strong”, which is a more upbeat forecast compared to the earlier “will strengthen somewhat further.”

Updated Fed forecasts

This December Fed announcement was accompanied by the release of the central bank’s updated economic forecasts, which provide clues on how monetary policy might fare next year.

Upward revisions were seen for this year’s GDP estimate, which was moved up a notch from the 2.4% forecast back in September to 2.5%. The unemployment rate also saw a positive revision, along with the PCE inflation estimate. The core PCE inflation figure was maintained at 1.5%.

Growth estimates for the next couple of years also enjoyed upgrades, along with positive revisions for the jobless rate from 2018-2020. However, inflation estimates were kept unchanged for those years. Another notable change was the Fed funds rate estimate for 2020, which was revised from 2.9% to 3.1%.

FOMC presser

The fun doesn’t stop there! A press conference soon followed the FOMC statement, and dollar junkies tuned in closely to Chairperson Yellen’s last hurrah before she passes the baton to incoming head Powell next year.

It turns out the current head honcho is not feeling as optimistic as many hoped, reiterating her cautious inflation outlook and how it could stay below target for much longer.

Yellen also shared her views on tax reform, citing that it could merely lead to a short-term boost instead of shoring up the U.S. economy in the long run. She added that FOMC members already incorporated the impact of tax cuts on their latest forecasts, noting:

“My colleagues and I mainly see the likely tax package as boosting aggregate demand but also having some potential to boost aggregate supply.”

Furthermore, Yellen explained that tax reform could lead to stronger investment, which would then support capital formation and productivity growth. However, she also warned that the magnitude of this impact is still uncertain.

“We continue to think as you can see from the projections that a gradual path of rate increases remains appropriate even with almost all participants now factoring in their assessment of the impact of the tax policy.”

In a nutshell, Yellen believes that tax reform isn’t likely to accelerate growth quickly enough to push the Fed to hike rates more aggressively.

Yellen also took a swipe at bitcoin, calling it a highly speculative asset and saying that it is neither a stable source of value or legal tender.

Major Market Mover(s):

USD

The dollar sank upon seeing downbeat CPI data, then again during the FOMC announcement, and tumbled once more when Yellen shared a more sober outlook on inflation, growth, and tax reform. Ouch!

USD/JPY fell from 113.40 to a low of 112.49, EUR/USD popped up to a high of 1.1824, GBP/USD recovered from a low of 1.3324 to a high of 1.3430, and USD/CHF is down to .9850

Watch Out For:

  • 12:00 am GMT: Australia MI inflation expectations (3.7% previous)
  • 12:30 am GMT: Australia jobs data (See Forex Gump’s trading guide!)
  • 2:00 am GMT: Chinese industrial production y/y (drop from 6.2% to 6.1% expected)
  • 2:00 am GMT: Chinese fixed asset investment ytd/y (dip from 7.3% to 7.2% expected)
  • 2:00 am GMT: Chinese retail sales y/y (increase from 10.0% to 10.3% expected)