A historic success, but the future is far from certain

17th December 2015 By: Ranko Berich

FOMC Meeting – 16/12/15

This rate hike is nothing less than a historic success for Janet Yellen’s Fed and its communication strategy. Interest rates have gone up without causing undue volatility and the Fed’s strategy for the future is crystal clear. The FOMC has done its job admirably and is now in a strong position to face an uncertain outlook in 2016.

The ‘dot plots’ accompanying the updated projections show that the FOMC is actually quite bullish on inflation and rates in 2016. A comfortable majority saw rates above 1% at the end of next year, indicating a high level of confidence in the economy.

Energy prices are a major wild card for 2016 and could force other central banks, such as the ECB, into further easing, creating a fresh downwards shock to inflation. The Fed could also face a productivity conundrum similar to the UK, which continues to baffle to the Bank of England. Despite these risks, the FOMC is undeniably confident in the economy and its inflation prospects.

Yellen’s ponderous caution in hiking rates has paid off and the Fed’s credibility will only increase as a result. The Fed chair was quick to put this authority boost to use, and made it clear that further moves in rates would be dependent on actual and expected progress towards the Fed’s goals. This may mean waiting some time before the next hike, but with inflation well below target and a number of factors that could drag prices down in 2016 it’s simply a shrewd move from the FOMC.