FOMC: Hike today is as nearly a foregone conclusion - BBH

Analysts at BBH note that the US dollar is paring yesterday's gains as the market awaits the outcome of the well-telegraphed FOMC meeting as in recent weeks, the combination of data and official comments has swayed markets, which had previously anticipated a hike in May or June and a hike today is as nearly a foregone conclusion as these things can get.  

Key Quotes

“The idea of not wanting to surprise the market, which some Fed officials underscored, can work both ways.  It means market expectations are primed.  It also means that when there is a nearly 100% chance discounted, not to deliver would also be a destabilizing surprise.”

“Investors will quickly look past a 25 bp hike.  Indeed, the market will be looking for clues on the timing of the next one.  There are two elements here.  One is the dot plot.  We expect the median and average to creep up, and suspect many may be underestimating the hawkishness of the regional presidents.  The other element is the assessment of the balance of risks.   Despite the prospect of slower Q1 growth (which is also consistent with the pattern since the financial crisis), the risks may be tilted higher going forward.”

“A Wall Street Journal survey found almost 70% of responding economists expect the next hike in June and 8.5% say July.  A fifth expected the Fed to wait until September.  Based on the current information set, we are inclined toward June.  It is partly based on the understanding that gradual hikes rule out back-to-back meeting moves now.  Our view is also informed by indications that the Fed's leadership has grown more confident of the resilience of the US economy and is no longer looking for confirmation.”

“Instead, we think the Fed has shifted to looking for opportunities to normalize policy.”