• In its final meeting of 2017, the U.S. Federal Reserve raised the target federal funds rate to a range of 1.25%–1.50%.1 It was the Fed’s fifth rate hike in this cycle and its third this year.21 While the Fed hike was largely expected, its economic projections were noteworthy in that the Fed substantially upgraded its estimate for economic growth in 2018.14
  • Given their rosy growth outlook, policymakers kept their rate projections for next year unchanged. They still estimate that the FOMC will raise rates three times in 2018, to 2.1%.14
  • Investors, however, seemed skeptical of the Fed’s current interest rate path as both the value of the U.S. dollar and the yield on the 10-year U.S. Treasury note declined after the Fed’s announcement.22 Much of the doubt can be traced back to the fact that inflation data remains muted.
  • On the same day that the Fed raised rates, for example, the Bureau of Labor Statistics released Consumer Price Index (CPI) data for November. On a year-over-year basis, CPI showed a solid 2.2% gain.2 However, as the chart highlights, core CPI data, which excludes volatile food and energy prices, rose just 1.7% and declined from one month earlier.2
  • Members of the FOMC have changed their tone on inflation recently, acknowledging that low inflation “could prove more persistent” than they originally anticipated.23 Indeed, as the Fed plots its way toward a normalized rate environment, it could likely remain bound by what have been persistently low inflation readings.

1 U.S. Federal Reserve, Fed Statement, http://bit.ly/2jUUe3n.
2 Bureau of Labor Statistics, CPI, http://bit.ly/2jKLr2f.
3 The Wall Street Journal, http://on.wsj.com/2Binx9Z.
4 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 Thomson Reuters Lipper.
6ICE Bank of America Merrill Lynch U.S. High Yield CCC Rated & Lower Index.
7 ICE Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
8 ICE Bank of America Merrill Lynch U.S. High Yield B Rated Index.
9 ICE Bank of America Merrill Lynch U.S. High Yield Master II Index (yield-to-worst).
10 Credit Suisse Leveraged Loan Index.
11 Credit Suisse Leveraged Loan Index (CCC rated component).
12 Thomson Reuters LPC.
13 Credit Suisse Leveraged Loan Index (yield to a three-year maturity).
14 U.S. Federal Reserve, FOMC projections, http://bit.ly/2Bh8q0L.
15 Bureau of Labor Statistics, PPI, http://bit.ly/2jfizlj.
16 U.S. Census Bureau, Retail Sales, http://bit.ly/Y4FaTF.
17 Federal Reserve Bank of St. Louis, U.S. 10-year Treasury yield, http://bit.ly/29ecBfp.
18 Federal Reserve Bank of St. Louis, U.S. 2-yr Treasury yield, http://bit.ly/2anGvQ0.
19 Federal Reserve Bank of St. Louis, 10-year/2-year Treasury spread, http://bit.ly/2oMWaP2.
20 Bloomberg, based on CME data.
21 U.S. Federal Reserve, http://bit.ly/29y0IjN.
22 The Wall Street Journal, http://on.wsj.com/2o1a94K.
23 U.S. Federal Reserve October-November minutes, http://bit.ly/2hVcZ95.


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