FOMC Preview: More consensus, but shift in number of rate hikes unlikely – Today’s expected 25bp rate hike by the Fed has been close to fully priced for at least a month, and so the decision itself will not have any market impact. The much bigger focus will be on to what extent the recent hawkish shift among FOMC doves – evident in recent public commentary – will translate to projections for more rate hikes over the coming years. While we expect the ‘dots’ for 2018, 2019 and 2020 to shift upward, we believe this upward shift will be concentrated among doves rather than hawks, and this should keep the all-important median projections unchanged. Already, the median projections are for one further rate hike this year, and an additional three hikes next year. This is somewhat more hawkish than will likely be thought necessary when the time comes, in our view (we project two rate hikes next year). Unless the centrists and moderate hawks also shift their rate projections higher, we think the medians for all years will remain unchanged (2018: 1 further hike; 2019: 3 hikes; 2020: 1 hike).
An increased consensus on the need for 3 rate hikes next year could nonetheless bolster market pricing further, which has moved significantly in recent weeks. Indeed, of the 100bp in tightening we project between now and next June, 78bp is now priced by OIS forwards, compared with just 61bp at the beginning of the month. However, we expect Chair Powell in his press conference to temper any overly hawkish interpretation of the ‘dots’. His most recent speech in Jackson Hole was actually somewhat dovish, expressing doubt over the usefulness of traditional policy guides like the NAIRU. Should he repeat such concerns, this would suggest caution will be needed from the Fed once we are at the FOMC’s median estimate of neutral (2.9%) – in the absence of significant inflationary pressure. Our base case is that the Fed will pause at this very level, i.e. once the target range for the fed funds rate reaches 2.75-3.00% by next June. (Bill Diviney)