The Federal Reserve made no policy changes at the conclusion of 2017’s first FOMC meeting, and passed on a would-be opportunity to dictate future policy moves. The statement’s tone was distinctly nonprescriptive, offering the same economic outlook as it has for months: moderate growth, below-target inflation, and gradual rate hikes amid an economy with balanced risks.
The pass in January follows a December policy move that was significant for a couple of reasons—it raised rates for the second time this cycle and revealed projections for faster rate hikes in 2017. But a larger nugget—which was buried in the detailed meeting minutes released several weeks later—is that the Fed is keenly aware of the heightened degree of fiscal uncertainty. For that reason, in today’s statement we didn't see any strong language that would tip the Fed’s hand one way or the other, as some might have expected following December’s seemingly hawkish move.
Clearly, the Fed has not bought into the notion—already accepted by many economic forecasters—that fiscal stimulus will launch the economy into higher gear. The Fed is not alone in its caution; our baseline outlook remains tempered as well, at least until we have more details on the Trump administration’s plans. We still expect three rate hikes this year—in June, September, and December. Economic data could easily disrupt this baseline, and financial market volatility and exchange rate movements could also figure more prominently in the Fed’s decision-making process.Because of this economic and policy uncertainty, the possible paths for interest rates to take now range more widely. We think the most likely scenario is one in which long-term bond yields rise by roughly the same amount as the short end of the curve, where 10-year debt finishes 2017 above 3%. Strong fundamentals in commercial real estate should limit the impact on cap rates. However, the underlying causes behind the rise in interest rates are crucial.