The U.S. Federal Reserve (the Fed) delivered another rate hike Wednesday, raising its target policy rate by 25 basis points to a new range of 1.25-1.50%. The decision was widely anticipated by economistsand fixed income investors.2  As such, the market’s reaction to the news today was relatively muted—as of 12 p.m. Pacific time, the S&P 500® Index is up 0.2% and the 10-year Treasury yield is little changed.

After a wobbly start in 2015 and 2016, the Fed found a rhythm to its policymaking this year—delivering a tightening announcement at each of its key quarterly press conference meetings (three rate hikes and the start of balance sheet normalization). Will the Fed be able to deliver four more hikes in 2018? Maybe. In our view, it comes down to three key issues.

1. Macroeconomics

First and foremost is the macro outlook. 2017 was a strong year for the global economy. The J.P. Morgan Global Manufacturing PMI™ hit an 81-month high in November, exhibiting some of the strongest economic conditions for the expansion thus far. And this global strength has rippled back into the U.S. in a positive way—taking pressure off the dollar, boosting domestic manufacturing and trade, and providing a tailwind for the earnings of large, multinational U.S. businesses. At Russell Investments, we expect global conditions to remain healthy in 2018.

Domestic hiring has been strong, too. The U.S. unemployment rate currently stands at a 17-year low of 4.1%.3 And, by almost every measure, the labor market is now moving beyond full employment. That’s mission accomplished for the full employment pillar of the Fed’s dual mandate, and our outlook for payrolls suggests we’ll see even more labor market tightening in 2018.

The big wildcard is inflation. Core personal consumption expenditure (PCE) inflation is still well below the Fed’s 2% target. The Fed has written off this inflation soft patch as a transitory blip. If this weakness persists into next year, the Fed will be forced to slow down. We know that technological change and intense competition have been dampening pricing power in several industries. While we recognize these forces, we are forecasting inflation to turn modestly higher in 2018. This view is predicated on two things:

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