Fed to maintain three hikes signal for 2018 – Danske Bank

In line with market pricing and consensus, analysts at Danske Bank expect the Fed to raise its target range by 25bp to 1.50-1.75% at today's meeting.

Key Quotes

“We expect the Fed to maintain the three hikes signal for this year but showing more confidence in the signal, as more of the dovish members now seem to support this. If we are right, this would likely be interpreted dovishly, as markets are speculating whether the Fed is about to hike four times this year. Markets have already priced in three hikes this year, which is quite a lot at this point. We think the recent average hourly earnings and CPI data support this. However, we note that some of the most outspoken doves do not vote this year (Bullard, Evans, Kashkari) meaning that the median dot among the voting FOMC members is likely higher than the median dot among all members.”

“In this sense, we agree with markets that the balance of risk is skewed towards a fourth hike although three remains our base case. New Fed Chair Jerome Powell also sounded slightly more hawkish at his hearing before Congress (at least on day 1, as he downplayed it on day 2), as he said his 'personal outlook has strengthened'. We do not expect big changes to the statement. The Fed will likely repeat that risks are ‘roughly balanced’, that it still monitors inflation 'closely' and that it expects 'further gradual increases'.”

“We think the Fed will signal it is time actually to hit the brakes by raising the Fed funds rate above the longer-run dot of 2.75% (the Fed's view on the nominal level of the natural rate of interest when the economy has normalised) in coming years, as we expect the Fed to raise the dot signal for 2019 from slightly more than 2 hikes to (close to) 3 hikes. This implies a Fed funds rate at 3.0% by the end of 2019. Markets have only priced in slightly more than four hikes from now until year-end 2019, against our expectation of six hikes.”

“Although we expect the Fed to signal that more hikes are needed than projected in December on the back of a more expansionary fiscal policy, we do not think the Fed will offset it one-to-one, implying the total policy mix is becoming more expansionary. That is also why we argue that there are upside risks to our US inflation forecast, especially next year.”