By Geoffrey Smith
December 13, 2017

Good morning,

The Federal Reserve is all-but certain to raise the target for its key Fed Funds interest rate later today, in Janet Yellen’s last meeting as chair of the central bank. That will take the target to 1.25% to 1.50%, a range that, for all of the disinflationary factors marauding across the global economy, still looks low for a country that is in the eighth year of an expansion, is running increasingly close to full capacity, and is driving financial asset prices to exuberant new highs.

A rate hike today will mean that the Fed has—just—delivered on its guidance of raising rates three times this year, while starting on the task of unwinding the huge purchases of bonds it made in the post-crisis era. However, the more important news will be in the language Yellen uses to describe the outlook for next year, and in the ‘dot plot’ that signals where Fed policymakers think rates ought to go in that period.

So far, the working assumption in markets has been for three hikes of 0.25 percentage point each next year, but the risk—especially in view of an imminent and substantial fiscal stimulus—must be that at least some policymakers start pushing for a faster pace of tightening: with the world economy firing on nearly all cylinders, it surely won’t be as easy next year for the Fed to stay marginally ‘behind the curve’ as it has done so far (at 4.1% in November, the jobless rate is already where the Fed expected it to be at the end of 2018). Inflation may still be running below expectations, but the last crisis happened not least because the Fed was lulled into a false sense of security by a CPI that hardly reflected the dire threat from the financial system.

Appearances are important too. It will spare the incoming Fed chairman Jerome Powell some embarrassment if the prospect of a fourth hike is introduced already today, by someone who won’t have to face political pushback, rather than as a direct response to the tax plans of the man who nominated him for the job.

For all that, mine is still a minority view. According to The Wall Street Journal‘s survey, most economists still see only three hikes next year. I would venture that if it really does end up being only three, it will be because the mere prospect of a fourth causes some serious market tantrums in the meantime. Time will tell.

News below. (Alan Murray will be back tomorrow.)

Geoffrey Smith
@alansmurray
geoffrey.smith@fortune.com

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