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Much of the commentary about the Fed’s action have noted that the FOMC statement used the word “gradual” not once but twice evidence of its dovishness.     The Fed’s dot plots continued to signal that the majority of officials see a 1.375% Fed funds rate at the end of 2016 as appropriate.   The Fed may call this gradual, but the December 2016 Fed funds futures contract implies that the Fed funds will average 84.5 bp at the end of next year.  The Fed’s gradualism is more aggressive than the market.

A key unknown is where the Fed funds market will settle relative to the range.  We suspect it will average below the middle of the range.  This will maximize the Fed control, with interest on excess reserves, set at the upper end of the 25-50 bp range.

Although it is not final, the US Congress is set to approve large spending and revenue bills that do two big things. First it extends numerous tax cuts that were set to expire.  This means that the headwind from fiscal policy will likely be reduced though it is difficult to see it as truly stimulative, as it extends the status quo.  Second, and what has captured the imagination of the market is the lift of the ban on US oil exports.   This coupled with new Iranian supply expected to hit the market shortly has weighed on crude prices (and sparked a narrowing of the WTI/Brent spread).