Fed Chair Yellen went out on a strong note, delivering on markets' carefully-cultivated expectations; U.S. growth continued to deliver good news; synchronized global growth was increasingly visible
“There's less to lose sleep about now than has been true for quite some time.”
The Fed rate hike: Delivered Janet Yellen’s last FOMC meeting as Chair produced the widely-expected 25 basis point Fed Funds target rate hike, as well as some mild surprises. First, there were two dissenters among the voters – Neel Kashkari and Charles Evans of the Minneapolis and Chicago Feds, both of whom argued in favor of keeping the rate at 1.25% to give the economy a bit more time to improve. Second, the FOMC explicitly cited the passage of the Trump tax bill as one of the reasons – albeit not the most important one – for the increase in its forecast for the next two years.
Third, Chair Yellen gave a detailed explanation of the Fed’s belief that the currently flattening yield curve isn’t a harbinger of recession. The short version involves the difference in underlying economic conditions – specifically that short-term rates had been aggressively tight during the previous inversions, and are quite accommodative now.
But one element of the press conference was no surprise at all: Yellen stuck to tradition, despite this being her last FOMC press conference, declining to identify which of the interest-rate forecasts in the widely-watched “dot-plot” represented her own.
U.S. Economy: Glad tidings Among the continuing flow of both hard and soft positive data about the economy: The National Federation of Independent Business, a small-business trade group, reported its Small Business Optimism Index at 107.5 – a level not seen since September 1983, and higher than its previous peak in December 2003. Producer prices ex food, energy and trade rose 2.4% year-over-year, and retail sales ex autos and gas rose 0.8% in November, well above expectations. A less-followed but key statistic also pointed upward: the retail sales “control group” rose at an annualized 6.6% rate during the three months ended November 30, 2017, the fastest pace since mid-2014, suggesting that holiday shopping continues to strengthen.
Other signs of growth: Still synchronized Germany’s central bank raised its forecasts for GDP for 2017 (2.6% vs 1.9%), 2018 (2.5% vs 1.7%) and 2019 (1.7% vs. 1.6%) along with its inflation forecasts; the European Central Bank (ECB) reiterated its pledge to stay accommodated as long as the European economy needs the help; Japan’s business sentiment hit an 11-year high according to the Bank of Japan; and China reported a moderation in producer price inflation, to a 5.8% annualized rate in November vs. 6.9% in October, with consumer prices rising 1.7%, slightly below forecast. These figures for China may suggest that new financial regulations are having the desired effect of slowing the economy down and reducing the country’s accumulated debt without tightening overall monetary policy.