Global Daily – Fed rate hike this year

by: Maritza Cabezas , Georgette Boele

Global-Daily-Insight-18-June-2015.pdf (215 KB)
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  • FOMC to hike rate this year, likely in September
  • The “dot plot” with FOMC rate hike expectations shows more gradual pace of rate hikes thereafter
  • Markets further scale back rate hike expectations

 

 

FOMC statement more optimistic, but cautious

After two days of meetings, the FOMC statement showed a positive, but cautious tone on the economy. Fed policymakers signalled that the economy is “expanding moderately after changing little in the first quarter” as “job gains picked up”. The statement also signalled the improvement in the housing market, while the inflation language was unchanged.

FOMC economic forecasts: improvement after slowdown

The Summary of Economic Forecasts, suggests that the weak first quarter growth has led the Fed to lower its GDP predictions for 2015 to 1.8% to 2% from 2.3% to 2.7% projected in March. The  economy, however, is expected to pick up in the coming quarters. The unemployment rate forecasts for 2015 are thought to be a bit higher than in March at 5.2% to 5.3% up from 5% to 5.2%. Chair Yellen mentioned during the press conference that a slight increase in productivity growth would support a somewhat slower pace of job gains in the coming time, leading to a bit higher unemployment. Inflation forecasts were broadly unchanged.

Rate hike this year, but divided on pace of hikes thereafter

The “dot plot” which forecasts participants views on the appropriate pace of interest rate normalisation shows that FOMC participants expect the lift off this year. The median continues to coincide with a rate hike in September which is in line with our view, but they have become more cautious on the pace of rate hikes thereafter. Participants have moved towards one or two quarter percentage point rate increases by December, while in March there were more officials expecting a half percentage point increase in 2015.  Starting with the lift off in September, we expect two rate hikes, given that we see a stronger acceleration of the economy in the second half of the year.

Markets further scale back rate hike expectations

Ahead of the Fed the Fed funds for December 2015 were around 0.365% and 1.19% for the end of 2016. Afterwards they moved respectively 5 and 9 bp lower. Right after the decision, the US dollar moved higher but fell under heavy pressure afterwards. The 10y US Treasury yields also moved around 8 bp lower. US equity markets gained somewhat.  These reactions reflect that the market is not confident about Fed rate hikes. We expect markets to scale up rate hike expectations in coming months, as it becomes clear that the Fed will hike in September. This should support the dollar.

daily 18 June