Policymakers are forecasting another three rate increases next year, although concerns about low inflation, which has consistently undershot the central bank's 2% target, give some market participants pause about that pace of rate increases. "The elusive inflation growth certainly seems to be the wedge between the Fed's three rate hikes and the market's expectation for about two hikes moving forward into the 2018", said IG market strategist Jingyi Pan. It is also continuing to slowly shrink its bond portfolio. That is consistent with its balance sheet reduction plan.
"Nonetheless, the trend of rising interest rates are unlikely to be reversed in the coming years and as such, mortgage servicing burden is expected to grow at the margin", he added. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Including all items, CPI rose 0.4% from October, accelerating on a jump in energy prices.
The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.
It also maintained its guidance on future hikes: "The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate, which is likely to remain, for some time, below levels that are expected to prevail in the longer run". However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The central bank said in a statement after its latest policy meeting that it expects the job market and the economy to strengthen further. An unexpected cooling in a key measure of United States inflation means FedReserve policy makers may be hard-pressed to raise interest rates more aggressively in 2018. On the day of Janet Yellen's final news conference as chair of the central bank, the Fed announced that the economy is on track to expand 2.5 percent next year - up from 2.1 percent in its current forecast - while unemployment is poised to dip below 4 percent in 2018.
That means that the Trump administration's tax overhaul, if passed by Congress, will have neutral effect on inflation.