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FOMC's economic projections cautioning markets of more rate hikes

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FOMC's economic projections cautioning markets of more rate hikes

The Federal Reserve's Federal Open Market Committee announced Dec. 14 it was raising its benchmark federal funds rate by 25 basis points to a target range of 0.50% to 0.75%. The U.S. central bank also released updated dot plot economic projections that show FOMC members notching up their expectations for rate hikes in 2017. The December projections show a median of three rate hikes in the next year while September projections showed a median of only two.

The latest dot plot projections put the federal funds rate at a range of 2% to 2.25% in 2018. It would take six hikes to reach this level if the FOMC continues raising rates in increments of 25 basis points.

Matt Lloyd, Vice President and Chief Investment Strategist of Advisors Asset Management, advised against using the dot plots as a road map for the future, adding that the projections can be a "Rorschach test" that shows market observers what they want to see.

"If you look at their projections, as far as confidence rates, you're getting a range of 3.5 to 4 percentage points," Lloyd said. "I don't understand why you would give it any type of credence."

Lloyd said he will weigh political factors as he thinks about the Fed's future moves. Because of the possibility of looser rules and the post-election stock market surge, Lloyd thinks the markets could absorb 100 to 125 basis points of gradual rate hikes over the next year and a half.

The external factors facing the Fed's future FOMC meetings may have been the reason for the large forecasting errors for 2016, Asha Bangalore, senior vice president and economist at Northern Trust Corp., said. Bangalore said it was widely expected that the Fed would raise rates four times this year, although there were events that forced the central bank to change course.

"It's different because when they made that call in 2015, they were expecting the economy to advance and did not have any inkling of China and Brexit and so on," Bangalore said.

Overall, the latest dot plots project the median federal funds rate over the "longer run" to be 3%, unchanged from the September projections.