Fed to maintain ‘dot’ signal for this year at three hikes – Danske Bank

In view of the analysts at Danske Bank, the February jobs report removed the last obstacle for a Fed hike on Wednesday, in line with the message Fed Chair Yellen set in her recent speech.

Key Quotes

“It is still a bit surprising to us that the Fed has turned so hawkish so quickly. There were not many signs in neither the last FOMC statement, the minutes from the last metering nor Yellen’s hearing in Congress that the Fed was going to hike already in March.”

“We do not expect any major changes to the statement, as not much has happened since the last meeting.”

“We expect the Fed to maintain the ‘dot’ signal for this year at three hikes in the updated projections. Yellen said in her speech that four hikes is likely one too many, as it would make monetary policy neutral instead of accommodative.”

“We expect the Fed to hike three times this year (March, July and December) and three-four times next year. We expect the Fed to begin the reduction of its balance sheet in Q1 18.”

“Fed still awaits more information about ‘Trumponomics’ but previous meetings have revealed that ‘almost all’ FOMC members think there are upside risks to growth due to the expectations of more expansionary fiscal policy. We have not got new information on Trumponomics since the meeting but the Fed has communicated it wants to offset more expansionary fiscal policy by increasing the hiking pace.”

“It is worth keeping in mind that the Fed is data dependent and will not hike unless data support the case – remember the Fed signalled four hikes in 2016 back in December 2015 but only delivered one. After the Fed turned more hawkish, we have seen a drop in the oil price, lower inflation expectations and a small selloff in the US equity markets –perhaps a small sign that the Fed has turned too hawkish, too quickly.”