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As expected, the Fed hiked rates during their December announcement, but what took many by surprise were their plans to keep tightening next year.

The Greenback was able to take advantage of the interest rate outlook and the flight to safety as sentiment soured on the prospect of higher borrowing costs.

  • U.S. existing home sales up from 5.22M to 5.32M vs. 5.20M forecast
  • U.S. EIA crude oil inventories down 0.5M barrels vs. projected 2.7M drop
  • FOMC hiked interest rates by 0.25% as expected to <2.50%
  • FOMC downgraded growth and inflation forecasts for 2018 and 2019
  • Fed head Powell: Below target inflation gives Fed room to be patient
  • Powell: Still expect GDP to be above potential but will monitor data
  • Powell: Political considerations play no role in our decisions
  • New Zealand economy grew by 0.3% in Q3 vs. projected 0.6% expansion
  • New Zealand trade deficit narrowed from 1317M NZD to 861M NZD

Major Events/Reports:

FOMC statement, forecasts, and presser

All eyes and ears were on Fed head Powell and his fellow policymakers as many expected them to hike but also strike a somewhat cautious tone during the monetary policy statement.

The Fed did hike all right, raising interest rates by 0.25% from <2.25% to <2.50% but gave little indication that they could hit the brakes on tightening anytime soon. There weren’t much changes on their official statement, apart from noting that the unemployment rate “declined” in September to “has remained low” this time.

It did acknowledge that risks remain roughly balanced but added:

“[The Committee will] continue to monitor global economic and financial developments and assess their implications for economic outlook.”

As for the updated economic forecasts, there were some downgrades dished out. For 2018, GDP is expected to come in at 3.0% versus the earlier 3.1% estimate while inflation could land at 1.9% versus the previous 2.0% forecast. Next year’s GDP estimate was downgraded from 2.5% to 2.3% while the inflation forecast was lowered from 2.1% to 2.0%.

FOMC Updated Forecasts (Dec 2019)
FOMC Updated Forecasts (Dec 2019)

There were also some changes in the dot plot of interest rate expectations, which signaled only two likely hikes next year versus earlier forecasts of three.

FOMD Dot Plot (Dec 2019)
FOMD Dot Plot (Dec 2019)

During the presser, Chairman Powell mentioned that the central bank will be continue trimming its balance sheet by $50 billion each month and will stay open to more hikes down the line. He did acknowledge that below-target inflation could allow the Fed to be patient but also pointed out:

“Policy does not need to be accommodative.”

Powell also deflected Trump’s calls for the Fed to stop hiking rates, citing that political considerations play no role in their decision-making.

Risk appetite stumbles

Investors seemed disappointed about the prospect of even higher borrowing costs next year as the Fed barely showed signs of cooling their tightening plans.

  • Dow 30 index closed 351.98 points down to 23,323.66 (-1.49%)
  • S&P 500 index is down 39.20 points to 2,506.96 (-1.54%)
  • Nasdaq is down 147.08 points to 6,636.83 (-2.17%)

Crude oil managed to pull up slightly from earlier declines, though, while gold slipped on dollar strength.

Major Market Mover(s):

USD

The scrilla seemed to be anticipating declines due to the FOMC statement but was positively surprised by more tightening hints and  less dovish than expected tone.

USD/JPY pulled up from a session low of 112.09 to 112.66; USD/CHF bounced off .9936 to .9956; EUR/USD slid from 1.1425 to 1.1364; GBP/USD tumbled to 1.2614, and AUD/USD is down to .7112.

Watch Out For:

  • 12:30 am GMT: Australia’s jobs data (Here’s what to expect!)
  • 2:00 am GMT: New Zealand credit card spending y/y
  • Tentative: BOJ monetary policy statement (No changes expected)
  • 4:30 am GMT: Japanese all industries activity index (2.0% rebound eyed)