Fed is likely to signal just one more rate hike – Danske Bank

Danske Bank analysts are expecting that the US Fed will likely keep the target range unchanged at 2.25-2.50% and make no major changes to the statement in its forthcoming meeting this Wednesday.

Key Quotes

“Powell & Co have emphasised that they will be ”  patient”  in raising hikes but the question is what that means in terms of the “dots”  , which are released alongside the rate decision.”

“We expect Fed to lower its ‘dot’ signal further to just one rate hike in 2019 (down from two)  . We expect them to be revised lower also for 2020 and 2021 and  we will not be surprised if the Fed signals “one and done”. We expect the longer-run dot is to be unchanged at 2.75%. That said, Fed has begun downplaying the importance of the dots given the increased uncertainty around the base case, so be careful putting too much weight on them going forward.”

“Our current base case is two Fed hikes (in June and December) based on our overall positive economic outlook.  Economic growth is strong, unemployment rate is moving lower, wage growth is moving gradually higher and risk sentiment in markets has rebounded. PCE core inflation, however, has softened in recent months.  However, if the Fed confirms it has changed its reaction function by looking more at inflation expectations and less on the unemployment rate, a June hike seems less likely, as marked-based inflation expectations remain well below historical average.”

“Still,  markets are pricing the Fed too dovish at the moment  , as they think the Fed is on hold for the rest of the year.  A change in Fed’s rhetoric can happen fast.  A good example is the rate increase in March 2017 where the market was not expecting a rate hike until Fed signalled it three weeks in advance.”

“We believe the Fed will announce it will end shrinking its balance sheet in Q4.”