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The US Federal Reserve raised its target interest rate today by one-quarter of a percentage point to just under 1 percent. The rise indicates that the Fed feels confident that the US economic recovery will continue. However, the forecasts of meeting participants do not show any increase in the median projection of the federal funds rate at year-end 2017 or 2018. In other words, the Fed is not signaling any intention to pick up the pace of policy tightening relative to the three rate hikes in 2017 that it signaled last December.
Economic data over the past few weeks have been close to what the Fed expected. The stock market is somewhat stronger. Financial markets may be factoring in a pickup in growth from possible tax cuts and deregulation under the new Trump administration. If tax cuts and deregulation do not materialize, the stock market is likely to give back some of its gains.
The Fed will wait to see what the administration and the Congress do. If they pass looser fiscal policy (especially large tax cuts) as I expect, then the economy will grow faster, inflation will rise, and the Fed will tighten faster. But the Fed will not make the first move. It is not even showing this upside risk in its median forecast yet. There is nothing to gain by anticipating a fiscal action that may never occur. The best strategy is to wait and react to whatever Congress and the president do.
