In a Nutshell: “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent.”

Rate Decision: Fed funds rate range increased to 0.50% to 0.75%

The Fed is starting to work like a Swiss watch: Every twelve months it raises rates whether it needs to or not, whether the economic data demand it or not. If it’s December, then the Fed is raising rates. Okay, I am being sarcastic. But the FOMC did increase the fed funds rate today, which hardly surprised anyone.

Did the Fed provide any insight into what it might do next year? Yes, but let’s not forget, last December it expected to raise rates several times this year, so believe the Fed’s forecast at your own risk. That said, the Committee’s forecast indicates the funds rate will likely be increased about three times in each of the next three years. By the end of 2019, the funds rate is expected to be about 3%, give or take 25 basis points. In other words, the expectation that rates would be increased gradually was reinforced.

As for the economy, there was some indication that the members believe inflation pressures are building a little faster than previously thought. That was signaled by the comment: “Market-based measures of inflation compensation have moved up considerably”. The word “considerably” was added. Since the choice of words is what we look for, that was really the only notable change in the statement. The description of the economy was largely the same, if a little muted.

So, what should we expect? First of all, nothing was said about the election or how the Fed may react if the proposed fiscal stimulus is implemented. At her press conference, Chair Yellen indicated that the members recognize there is great uncertainty about the extent of any fiscal stimulus. Thus, while the Fed cannot react now to something they don’t know about, they will respond once the stimulus package is passed.

In summary, the Fed raised rates today, indicated that rates will likely go up three times next year and left the door open for further increases, depending upon the stimulus package that Congress passes. As I said before, if the Trump stimulus plan is passed in any form, by the second half of next year, we could be seeing inflation nearing 3%. If that is the case, three to four increases in 2017 looks likely and if there is a major stimulus package, we could see upwards of six increases (or 150 basis points) in 2018.

(The next FOMC meeting is January 31- February 1, 2017.)