We expect the Fed to hike in July and December - Danske Bank

After the latest FOMC meeting, analysts from Danske Bank, expect the Federal Reserve, to raise rates in July and December and three to four times next year.

Key Quotes: 

“As expected, the Fed’s May meeting was quite dull in the sense that we did not get any new information”.

“Most interesting is that the Fed thinks the weak GDP growth of 0.7% q/q AR in Q1 was ’likely to be transitory’. The Fed still expects growth to continue at a moderate pace leading to further labour market tightening and inflation to stabilise around 2%.”

“It will be more interesting to listen to the upcoming Fed speeches for their views. While consensus is that the Fed will hike at the June meeting, we are more sceptical, because of the weaker economic data as well as still too low inflation in the US and the Fed’s desire to begin reducing the balance sheet soon, which we call ‘quantitative tightening’ (QT).”

“We think the Fed wants to send up a trial balloon in June by announcing what conditions would trigger a change in its current reinvestment strategy in order to avoid a new round of ‘taper tantrum’.”

“We think actual quantitative tightening will start in Q1 18. We expect the Fed to hike in July and December and three to four times next year (although the outlook, especially for next year, has become more uncertain, as it depends both on the Fed’s strategy on quantitative tightening and Trump’s ability to deliver on Trumponomics).”