KEY DATA: Imports: -0.3%; Fuel: -3.9%; Exports: -0.1%; Farm: +0.6%/ Foreclosures (Over-Year): -24.9%

IN A NUTSHELL: “The strong dollar is keeping inflation down, which is a challenge for the Fed.”

WHAT IT MEANS: The FOMC is going to do its annual duty of raising rates a massive one-quarter percentage point tomorrow, but the real question is: How much will the Fed hike next year? With the labor market pretty much at full employment, the only thing left is for inflation to hit the Fed’s 2% target and if energy prices remain where they are, that could happen in the next couple of months. But there is a countervailing force: the dollar. The Trump election has led to a sharp rise in the trade-weighted value and that could keep import prices down. The cost of imported products fell in November and that came even before any impacts from the higher dollar could translate into lower prices. One major factor, the fall in energy costs, has been unwound and that should lead to a rise in the energy component of the import price index this month. But even excluding energy, prices were down, though minimally. That said, over the year, non-fuel import prices are largely flat and with energy prices actually increasing, it looks like import costs could start adding to inflationary pressures. On the export side, the long-suffering farm belt is starting to see some increases in their prices. In 2015, agricultural export prices fell double-digits but will likely end up close to flat this year. Similarly, non-farm export prices will probably be up a little.

The deep pit that housing fell into when the bubble burst looks to be largely filled in. CoreLogic reported that the foreclosure rate declined sharply in October and is beginning to close in on the level seen before the bubble hit. The percentage of homes that are seriously delinquent in their mortgage payments hit the lowest rate since August 2007. We are not quite there yet, especially given the significant problems that remain in states such as New Jersey and New York, but the housing market is nearly healed.

MARKETS AND FED POLICY IMPLICATIONS: How long the dollar’s rally will continue is unclear. Irrational exuberance, at least to some extent, has likely taken hold in some of the financial markets. But a strong dollar does create some issues for the Fed, as the members seem ready to start taking seriously the task of getting rates back up to normal levels. The stronger the dollar, the lower the cost of imported goods. I think the FOMC members would love to see inflation closer to 3% than 2%. That would give them a blank check to do as they please, especially since the full employment mandate has been met. But, tomorrow is another day, which does correspond with a FOMC meeting and press conference, so let’s wait and see what comes out of that discussion.