The after effects of hurricanes Harvey, Irma, and Maria have done little to sway the opinion of Federal Reserve members that the economy is ready for further rate hikes. While leaving rates unchanged at today's meeting - as expected - they set the table for December. The Fed essentially waved off the hurricane-related September payrolls declines, and more notably strengthened rhetoric about economic growth, which they now characterize as "rising at a solid rate" compared to September's "rising moderately." Meanwhile the Fed added text noting a pickup in business fixed investment over recent quarters. In fact, it's hard to find much in today's statement that would put a December rate hike in doubt.
Despite the hawkish tone of the statement, market odds of a December rate hike were little changed following the statement, moving to 87.5% from 82.8% two days ago. That said, just two months ago the markets had 34.5% odds on a third rake hike in 2017. Looking further ahead, markets are pricing in one to two rate hikes in 2018. We think three hikes next year more likely, as improved economic and tax policy out of Washington push economic growth higher.
In the meantime, the Fed will continue to reduce its balance sheet at a pace of up to $10 billion per month for the fourth quarter, increasing that to $20 billion monthly pace in the first quarter of 2018, $30 billion in Q2, $40 billion in Q3, and $50 billion in Q4. After that, the Fed is projecting it would maintain that $50 billion monthly pace until it's satisfied with the size of the balance sheet. (For the foreseeable future, the balance sheet cuts would be 60% in Treasury securities and 40% in mortgage-related securities.)