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US could see multiple rate hikes in 2017 as economy moves out of 'danger zone'

For just the second time since the 2008 financial crisis, the U.S. central bank lifted its key interest rate.

The Federal Reserve's 25-basis-point rate hike was widely anticipated by financial markets, but projections that there will be multiple rate hikes in 2017 came as a surprise to some market observers.

Scott Anderson, chief economist and senior vice president of Bank of the West, said the Federal Open Market Committee's Dec. 14 vote to lift the target range for the federal funds rate to between 50 basis points and 75 basis points had already been largely priced into the markets. He said the Fed's outlook on the economy has not changed drastically, with the biggest adjustment being a lower projected unemployment rate next year, at 4.5%.

"I think the markets are really focused on the outlooks for rate hikes in 2017 and beyond," Anderson said. "There, we got a little bit of a surprise with the FOMC dot plot for 2017, since there are now three rate hikes [projected] rather than two that they put out in September. It's still a gradual tightening path for the Fed, but maybe a little less gradual than they thought a few months ago."

Anderson expressed cautious optimism about the outlook for the U.S. economy in the coming years, with markets "holding their breath" about the incoming Trump administration.

"There's potential for stimulus which would be an upside, and then any sort of trade disputes or currency disputes that could develop around trade policies could be a negative," Anderson noted. "That's why I think the Fed has been kind of cautious here in terms of factoring in a lot of changes in their outlook, but I think they're pretty comfortable with where the labor market is right now, and they obviously think the U.S. economy is strong enough to withstand a gradual rate hike today."

Vining Sparks analyst Marty Mosby said that the central bank's decision was a result of a strengthened labor market and an economy that rebounded in the third quarter.

"What was more important today is that they talked about a couple of rate hikes next year still," Mosby said. "Hopefully they will be able to follow through on that. If we can get a couple of more in '17 accumulated, that will help bank profitability and reflect that the economy is not in the danger zone again like when we were at zero rates."

Mosby thinks that U.S. trust banks and superregional banks with asset sensitivity are in the best position to take advantage of higher interest rates.

Keefe, Bruyette & Woods analyst Brady Gailey agreed that a rate hike is welcome news for most banks. He said KBW is expecting two rate hikes in 2017, as well as in 2018.

"We're starting to see over 100 basis points of rate increase, and that will translate into a noticeably higher margin for a lot of banks," Gailey said.