Daily Commentary BY THE CURVE TEAM –

The Fed Continues On Their Path

14th of December, 2017

The Fed followed through with their plan to hike in the December meeting and there is almost certainly more to come.

As expected, the Fed lifted the cash rate target by 0.25% to a range of 1.25%-1.50% this morning. The market was in full anticipation and it was almost a formality heading into the December meeting. Interestingly enough, US core CPI for November missed forecasted levels by 0.1% but this did not bear much weight in the overall scheme of things.

In the accompanying statement, the Fed remained positive regarding the state of the economy and indeed the low inflation environment. The upbeat tone around underperforming inflation was again the target of some questions but Fed Chair Janet Yellen stuck to her guns and continued to say what she has been saying all year; the factors negatively impacting inflation in 2017 will not be repeated next year. Who knows whether this will prove true but it seems pretty optimistic when considering the low earnings story.

The Fed have now raised rates four times in the last 12 months and the latest dot plot charts did not change materially overnight. If all goes to plan in 2018, the Fed will have hiked another three times, with two more hikes in 2019. When taking into account our domestic central bank, the gap between the RBA’s cash rate and the Fed’s at the end of next year might be significantly wider than it is now. Our yield curve seems to be on flat trajectory and it would be unlikely to see the front end (the official overnight cash rate) have any movement into the heart of next year.

The other key happening out of the US was the broad agreement on tax reform between the Senate and the House. Changes to the corporate tax rate and the top personal tax rate is rumoured to have been agreed upon but final voting is likely to be next week. Domestically, Australian labour market figures are due at 11.30am this morning with the survey number being +19k.

James Winder

Client Relationship Manager