Fed: Rate hike without big changes to the dot plot - Danske Bank

Analysts at Danske Bank, expect the Federal Reserve to hike the target range by 25bp to 1.75%-2.00% next week without making big changes to the dot plot.

Key Quotes:

“In line with consensus and market pricing, we expect the Fed to hike the target range by 25bp to 1.75-2.00% at next week’s meeting (the interest rate on excess reserves (IOER) has usually been at the high end of the range but is likely to be hiked by only 20bp as a technical adjustment).”

“We do not think the Fed is going to make big changes to its current dot plot and it will continue to show a more or less even split between those signalling three or four hikes this year. As only one member needs to raise its dot from three to four hikes, one should not necessarily interpret it as a hawkish signal if the median dot is lifted from three to four hikes.”

“The median dot for 2019 is likely unchanged at three more hikes and the Fed will continue to signal that it will raise the Fed funds rate above the natural rate, as it times to hit the brakes due to more expansionary fiscal policy. Our base case is one additional hike in December but the risk is skewed towards two hikes (i.e. three hikes this year with risk skewed towards four).”

“While a Fed June hike is widely expected and as such should not give rise to a significant market reaction, a key issue will be whether markets sense that the Fed is closer to being done on hikes. We do not think that is the case and maintain that the market is pricing the Fed too softly beyond 2018. To the extent that the recent recoupling between the USD and US yields continues, this suggests that the USD will stay supported for some time still.”