All eyes on the Fed, too ambitious? - Scotiabank

Analysts at Scotiabank Economics continue to expect another ¼ point fed funds target range hike to 1.25-1.5% at the December 13th FOMC meeting followed by two more next year and two in 2019. 

Key Quotes:

"This is somewhat less than the FOMC ‘dot plot’ given the uncertainty surrounding drivers of low inflation."

"The appreciation of the USD until earlier this year reduced core inflation by up to a half percentage point by the Fall, an effect we expect to be reversed into 2018H1 while spare capacity has already closed."

"By next October, the Fed will have fully implemented its plan to reduce bond purchases by up to $600 billion per year depending upon the flow of maturing Treasuries and MBS prepayment risk."

"Such a pace will reduce the Fed’s balance sheet holdings from about US$4¼ trillion at present to the $2.5-3 trillion range by the end of 2020 that we judge to be a longer-run equilibrium."

"Continued international appetite for Treasuries, continued safe haven appeal due to stock market and geopolitical risks and late cycle dynamics are more likely to result in curve flatteners pending the outlook for fiscal deficits."