As expected, the US Federal Reserve has increased its target rate by 25 basis points – but its 'dot plot' expectation for future hikes is not as hawkish as expected.
New US Federal Reserve chair Jerome Powell fronted up to the press early Thursday morning Australia time to deliver a widely anticipated rate hike – the sixth since the Fed began lifting rates in December 2015.
The 25 basis points increase to the Federal Fund Rate takes the US central bank's target range to between 1.5 per cent and 1.75 per cent.
While yesterday's rate hike almost completely priced into markets, of more interest to observers was the Fed's 'dot plot', which lays out Federal Open Market Committee (FOMC) members' expectations for future hikes.
The 'dot plot' shows an FOMC evenly split between three and four rate rises in the current calendar year. Next year will likely see another hike, and 2020 will see at least one more.
Markets were somewhat taken aback by the slightly less hawkish dot plot, especially given comments by several FOMC members that "headwinds have shifted tailwinds".
The median dot pot implies three hikes in 2018, but Fidelity International portfolio manager Nick Peters warned investors not to be fooled by the graph.
"In essence, the FOMC is now perfectly split between three and four hikes, and all but gone is the tail of those who thought there were downside risks to that. Four hikes is a very real possibility. But 2018 may not be the most important dot," Mr Peters said.
"The Fed is willing to wager that rates will need to be structurally higher than previously thought, in that its ‘long-run dot’ moved slightly higher for essentially the first time after years of moving down. Powell suggested that the Fed will tread carefully, but is open to the possibility that this could extend further," Mr Peters said.
"These later dots are most important for long-run funding costs, and in turn growth and investors."