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Senior Analyst at Danske Bank, Mikael Olai Milhøj, expects rate hikes in December, March and June, which would take the Fed funds rate to 3.00%, the Fed’s long-run estimate of where monetary policy is neither expansionary nor contractionary.

Key Quotes:  

“The Fed meeting turned out pretty much in line with what we wrote in our FOMC preview, as the Fed raised the target range by 25bp to 2.00-2.25% and did not send any new important signals to the markets, supporting our view that the Fed is on autopilot and neutral is the destination.”

“The Fed chose to remove the sentence that “monetary policy is accommodative” from the statement, but in our view it does not matter much, as it just reflects reality, as the hiking cycle has been underway now for some time.”

“It is more ‘stop and go’ for the Fed when neutral is reached, as further hikes depend on how the economy is doing and how markets are reacting to monetary tightening. The median Fed dot signals that the Fed thinks it is appropriate to continue hiking and the upper end of the target range is set to peak at 3.50% in 2020. Seven FOMC members think that it is necessary to hike once more in 2020, which is one hawkish takeaway from the meeting.”

“We still believe that the Fed will hike four times from now until year-end 2019 (in December, in March, in June and one time in H2 19), which would bring the upper end of the target range to 3.125% by year-end 2019.”

“With the Fed set to stay on autopilot for now, US rates are set to stay a source of USD support. This should help cement the status of the dollar as a carry currency both in terms of the level of, and the change in, short-end yields.”