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Today, all eyes are on the Fed and a 25bp rate hike is all but a done deal (including mostly likely a matching hike in the IOER rate), according to analysts at Rabobank.

Key Quotes

“This move has been well-telegraphed in August already and the recent performance of the US economy has only supported the Fed’s assessment of “solid” growth of the economy. However, market participants will scrutinize the statement and Mr. Powell’s explanation in the press conference for signs that the Fed is (finally?) becoming more concerned about protectionism, about recent emerging market stress or about inverting the yield curve, which so far hasn’t stopped them from slowing down the hiking pace.”

“As our Fed-watcher Philip Marey notes, our forecast of 3 hikes for this year has become increasingly challenged. While the June dot plot revealed a delicate 8-7 balance of the dot plot in favour of 4 instead of 3 hikes this year, the strength of economic data for Q2 and Q3 may have shifted that balance in favour of 4 hikes in the new dot plot, this month.”

“For now, we stick to our forecast of 3 hikes this year, but if the Fed remains sanguine about the escalating trade wars a fourth hike becomes more likely. Last but not least, the meeting should also lead to the next step in the balance sheet normalization program that was announced in September last year. Since October 2017 only principal payments that exceed a gradually rising cap are reinvested.”

“Once the caps reach their respective maximums of USD 30bn/month for treasuries and USD 20bn/month for agency debt and MBS -which will be the situation in October this year- they will remain in place until the FOMC judges that the Fed is holding no more securities than necessary to implement monetary policy efficiently and effectively.”