Fed is on the reactive side and risk getting behind the curve – Nordea Markets

By | June 13, 2018

“As widely expected, the target range for the federal funds rate was raised by 25bp to 1.75-2.0% at today’s FOMC meeting. The uncertainty around the meeting was whether the median FOMC member would raise the forecast for future hikes in the so-called dot-plot,” Nordea Markets analysts note.

Key quotes

“And as we expected, the median now shows two more hikes this year and thereby a total of 4 hikes in 2018, up from 3 in March. At the same time, the dot-plot still indicates 3 hikes in 2019. The long run neutral level was not revised and the median level still stands at 2.9%.”

“The Fed came out moderately hawkish as they raised the number of expected hikes this year. Our impression is increasingly that the Fed is on the reactive side and risk getting behind the curve at some point.”

“As Powell highlighted, the economy is doing very well and will continue to do so with strong tailwinds from fiscal policy and in sum still accommodative financial conditions. With the labour market already tight and wage growth on the rise, we see risks to the upside to inflation, which, in turn, tilts the risks towards the Fed having to increase the pace of rate hikes at some point.”

“However, we still see the Fed more or less on auto pilot delivering one 25bp rate hike per quarter until data tells them that enough is enough. We have two more rate hikes factored in for this year and three more in 2019.”

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