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Elliot Clarke, Research Analyst at Westpac, suggests that a December hike is in the pipeline for the FOMC, in addition to the further three hikes thereafter, to September 2019.

Key Quotes

“Beginning with their central view on the economy, Vice Chair Clarida made clear that US economic momentum remains “robust, as indicated by strong growth in gross domestic product (GDP) and a job market that has been surprising on the upside for nearly two years”. Chair Powell further added that the FOMC is now close to fulfilling its objective of “maximum employment”, highlighting the structural strength of their economy.”

“As per the November minutes, it is then not surprising that the preference of the vast majority of the Committee remains repeatedly tightening policy over the coming year, albeit in a gradual, data-dependent manner. This caveat recognises policy has a lagged effect on the economy, as highlighted by Chair Powell in his speech, and that neutral is an uncertain concept.”

“Both Chair Powell and Vice Chair Clarida characterised the current stance of policy as “just below” FOMC members estimates of neutral – a 100bps range, from 2.5% to 3.5%. Returning policy to a neutral setting could therefore mean one rate hike or five – depending on the durability of current momentum.”

“We continue to hold that the number of rate hikes from here is likely to be towards the top end of that range. We see four hikes from December 2018 to September 2019. This would result in a peak federal funds rate of 3.125%, a touch above the longer-run neutral rate projected by the FOMC, but below the 3.4% peak that their September forecasts signalled for 2021.”