FOMC will raise the federal funds rate target to 0.50-0.75% - Nomura

In line with market expectations, analysts at Nomura expect the FOMC will raise the federal funds rate target to 0.50-0.75% at the conclusion of the 13-14 December meeting.

Key Quotes

“We think that the incoming data since the last meeting has been sufficiently positive for the Committee to conclude that the case for rate hike has been finally met.”

“On the policy statement, we expect the paragraph on current economic conditions to point to continued growth. Additionally, we expect the Committee to highlight two notable developments – a sharp drop in the unemployment rate and a pickup in market-based measures of inflation compensation – in the statement. On the economic outlook, we expect no substantive changes, although the Committee may acknowledge a shift in the balance of risks to the positive side given the potential fiscal stimulus that will likely be realized under a Republican-led Congress and a Trump White House.” 

“In addition, we will receive a new set of forecasts from the FOMC participants. We expect the participants to mark their 2016 outlook to the new data received since the last update. Since the September meeting, data suggests growth reaccelerated in Q3 and the unemployment rate declined to 4.6% in November. Taking these factors into account, we think that the median growth forecast in 2016 will be revised up and the median unemployment rate will be revised down. On inflation, given the recent moves in energy prices, we think PCE headline inflation forecast for 2016 will be revised up slightly higher but we think that the core inflation forecast will remain unchanged.” 

“Our base scenario is that FOMC participants will not change their outlook for 2017 and beyond as we do not think the Committee will incorporate the possibility of fiscal expansion. It's unclear when and how FOMC participants will take into account potential changes in fiscal policy. In that sense, there is some risk that some participants could raise real GDP projections for 2017 and 2018 in anticipation of fiscal expansion. And, given the recent decline in the unemployment rate, the unemployment rate forecast for 2017 could be also revised lower.”

“On the dots, as the data have come in broadly in line with market expectations, we do not think that the Committee will adjust the path of rates materially.”

“Last, Chair Yellen will hold a press conference after the conclusion of the two-day policy meeting. We will likely hear the reasons that led the Committee to raise rates. We will also listen for any clues on how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted next year.”