FOMC hikes rates, but Evans and Kashkari dissent
The US central bank went ahead with its third rate hike of 2018, as expected, but two rate-setters dissented, voting instead for no change.
As had been amply discounted by financial markets, the Federal Open Market Committee hiked the target range for the Fed funds rate by 25 basis points to between 1.25% and 1.50%.
However, in an unexpected development two members of the Federal Open Market Committee, Charles Evans and Neel Kashkari voted against that move, saying they preferred to keep rates unchanged.
Dissent by the former, the head of the Chicago Fed, surprised Michael Gapen at Barclays Research.
"Evans was a surprise to us as he generally prefers to avoid dissents in favor of active discussion at the table during the meeting itself," Gapen said.
Shortly following the release of the policy statement, the yield on the benchmark 10-year US Treasury note was down by four basis points at 2.36%, versus 2.42% right before the announcement.
Significantly, the so-called 'dot plot' graph showing rate-setters' predictions for interest rate hikes and the economy over the next three years continued to point to three tightening moves in 2018, although now only two hikes were expected in 2019, followed by another in 2020.
When they last submitted their forecasts for the Fed funds rate on 19 September, Fed board members and regional presidents projected three hikes in 2019 and none in 2020.
On shorter time horizons, in its policy statement the US monetary authority reiterated that near-term risks to the economic outlook "appeared roughly balanced" and that the committee would continue to carefully monitor how inflation behaved relative to its "symmetric" goal for price stability.
Nevertheless, at the start of her speech half an hour after the rate hike was announced, outgoing Fed chair Janet Yellen emphasised how labour market growth had been "solid", as well referencing strong exports and the "highly uncertain" impact that tax cuts might have.
To take note of, she also indicated that policymakers had incorporated the most likely impact of the White House's tax cut proposals in their projections submitted for the Summary of Economic Projections or dot-plot.
For Ian Shepherdson at Pantheon Macroeconomics, the Fed was simply being far too optimistic.
"The Fed appears to be assuming either a surge in productivity growth or a leap in participation; they might happen but we think a more likely end-18 unemployment rate is 3.5% or less; had the Fed forecast that, they would have had to put in another rate hike in the dotplot for next year. The inflation forecasts for 2018-to-20 are all unchanged from September, despite the tighter labor market. In short, the Fed forecasts an endless expansion, with minimal inflation pressure, despite unemployment well below their Nairu estimate - unchanged at 4.6% - forever and interest rates peaking at 3.1%. We wish Jay Powell the best of luck; he's going to need it."
On a more mixed note, Paul Ashworth from Capital Economics said: "We anticipate that a slightly stronger rebound in core inflation next year will eventually prompt the Fed to hike rates four times next year. On the other hand, whereas the Fed's projections show the fed funds rate continuing to rise in 2020, to 3.1%, we think that a cyclical downturn will have developed by then, forcing the Fed to begin loosening monetary policy again."