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January FOMC Meeting: Status Quo with a Hawkish Twist

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Part 3
January FOMC Meeting: Status Quo with a Hawkish Twist PART 3 OF 3

What’s the Fed’s Outlook for the US Economy?

US economy continued to expand

In the FOMC’s January statement, the committee said that information received since the last meeting indicated that the US economic activity has been increasing at a solid pace. Also, the labor market has continued to strengthen. The economic outlook remained positive—taking the gains in employment, household spending, and business (VOO) investment into account. Inflation (TIP), which has been lagging in recent months, picked up the pace. Inflation is expected to reach the 2% goal in 2018.

What&#8217;s the Fed’s Outlook for the US Economy?

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Recent economic data

Recent economic data, especially the numbers from the last quarter, declined from the third quarter. The decline was primarily due to smoother demand after the spike from hurricane recovery. The first estimate for the fourth quarter GDP was reported at 2.6%—a decline from over 3% growth in the second and third quarters. The annual GDP growth for 2017 is 2.5%. Core GDP, which includes business investments, consumer spending, and housing (XHB) adjusted for inflation (VTIP), grew at an impressive rate of 4.6% in 4Q17 and 3.3% in 2017. The growth was the fastest recorded since 2014, which indicates strong US economic growth.

Takeaways from the Fed’s economic outlook

The Fed’s positive outlook could be a hawkish twist to the current monetary policy scenario. If the US economy accelerates because of the impact of the tax cuts and tariffs that were announced recently, the chance of a faster rate hike pace improves dramatically. A faster-than-expected rate hike could lead to more trouble for the bond (BND) markets. Investors could start to demand higher yields. An increase in yields could have a negative impact the high-yield bond market. As a result, the increase in borrowing costs for corporate could be negative for the industries.

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