One and done? Why the Fed's aggressive plan for 2017 may fizzle. Again

Janet Yellen
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Janet Yellen

The Federal Reserve's 25 basis point rate increase on Wednesday was widely anticipated and arguably already priced into the market.

The unknown was the language in the Federal Open Market Committee statement and documents accompanying the rate decision and whether or not it would provide additional guidelines for the future of monetary policy in the remaining nine months of the year.

The statement was disappointing, offering few hints as to the number or timing of future rate hikes. Acknowledging improvement in the underlying economy, the Fed remained wary of overemphasizing the gains, particularly on the inflation side, noting an 'asymmetric' target.

Over all, the Fed appears cautiously optimistic that the Committee will be able to continue to move forward with a number of rate increases in the remaining months of 2017 with the median forecast anticipating just two additional rate hikes this year.

However, it is clear that the Fed does not want to paint itself into a corner. Going into 2016 the Committee was (overly) optimistic that it would be able to raise rates three maybe four times, but actual policy initiatives fell well-short with only a single hike in December.

Facing a number of barriers last year including sluggish Chinese growth, moderate domestic growth, emerging market unrest, equity market volatility, a rising U.S. dollar resulting in a hard-hit manufacturing sector, these factors could again derail the Fed this time around with an additional wild card stemming from fiscal policy.

At this point, despite the lack of robust or solid data, the Fed is taking advantage of the current moderate conditions. Nevertheless, with mounting uncertainty here at home, not to mention abroad, particularly with a series of key political elections occurring through the spring and summer months, the Fed appears willing to keep its options open.

Cautiously optimistic, the goal remains additional hikes. The reality however, may be tempered by the still-moderate economic activity at home and fiscal unknowns around the globe. In other words, meeting even the lowered expectations of just two additional hikes this year will be a challenge for Fed officials without a meaningful pickup in the domestic economy.

Commentary by Lindsey Piegza, the chief economist for Stifel, Nicolaus & Company, specializing in the research and analysis of economic trends and activity, world economies, financial markets and fiscal policies. Piegza joined Stifel in 2015 amid the merger with Sterne Agee where she served as chief economist. Previously, Piegza served as the economist for FTN Financial for eight years in NYC. Follow her on Twitter @lindseypiegza.

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