FOMC Preview: Fed set to hike, focus on outlook for 2017 – Danske Bank

In line with consensus, Senior Analyst, Mikael Olai Milhøj at Danske Bank, expects the Fed to raise the Fed funds target range 25bp to 0.50%-0.75% from the current 0.25%-0.50% at the FOMC meeting today, as economic data have improved, the labour market is tightening and financial markets are calm.

Key Quotes

“Markets have fully priced in such a rise.

• Since everyone expects a Fed rate rise, the most interesting question is how many hikes to expect next year from the Fed. We expect the median ‘dots’ to stay unchanged, signalling two hikes in 2017 and three in 2018, as many FOMC members have said that they want to analyse Trump’s actual economic plans before taking action. Also we think the FOMC members will be reluctant to raise the ‘dots’ prematurely, as they had to revise them down several times this year.

• For the same reason, we do not expect major changes to the growth, core inflation or unemployment forecasts (the markets also tend to focus less on them). That said, one thing to look for is whether the Fed revises down its NAIRU estimate from the current 4.8%, as the unemployment rate is currently 4.6% but wage growth is still subdued (although it is trending up).

• We see a chance that the longer-run median ‘dot’ will be revised down to 2.75% from 2.88% currently, as it needs only one FOMC member currently indicating an end rate of 3.00% to revise it down for the longer-run median ‘dot’ to be revised down as well.

• It is important to remember that the Fed turns more dovish next year due to shifting voting rights as Loretta Mester, Esther George and Eric Rosengren lose their voting rights. Thus the median ‘dot’ for next year may actually overestimate the median ‘dot’ among voting FOMC members.

• There are two vacant seats on the board right now. As President-elect Trump has criticised the low interest rate policy, it indicates he will nominate two hawks, although it is still unclear what he will do in practice, since a too hawkish Fed will hurt his plan to boost growth. That said, even if Trump nominates two hawks, it is not enough to tilt power to the hawks in 2017.”