Research Team at Danske Bank, suggests that in line with most other
analysts and market participants we expect the Fed to hike 25bp at its
meeting next week.
Key Quotes
“Markets and analysts agree on Fed hike next week: After last week’s ECB meeting, focus is now on the Federal Reserve, who we expect to start its first hiking cycle since 2004 when the FOMC meets next week. We are not alone in this view. Currently the market prices 19bp, corresponding to around 85% probability of a hike next week (assuming that the effective Federal funds rate will settle below midpoint after a hike due to a large amount of liquidity in the system), which is as close as the market can price it ahead of the meeting. Of analysts 60/72 expect the same (could be higher as it has not been updated after the November jobs report). This is also in line with the latest FOMC projection from September and recent FOMC members’ communication.
• The IOER and ON RRP are expected to be set at 0.50% and 0.25%, respectively. Due to very large excess reserves, we expect the effective Federal funds rate to settle in the range 31bp-37bp.
• The US swap yield curve usually flattens after a hike. The 2Y to 5Y segment suffers the most, while the effect on 10Y is inconclusive.
• The USD (DXY index) usually strengthens going into the first hike and weakens thereafter. Inconclusive effect on FX volatility.”
Key Quotes
“Markets and analysts agree on Fed hike next week: After last week’s ECB meeting, focus is now on the Federal Reserve, who we expect to start its first hiking cycle since 2004 when the FOMC meets next week. We are not alone in this view. Currently the market prices 19bp, corresponding to around 85% probability of a hike next week (assuming that the effective Federal funds rate will settle below midpoint after a hike due to a large amount of liquidity in the system), which is as close as the market can price it ahead of the meeting. Of analysts 60/72 expect the same (could be higher as it has not been updated after the November jobs report). This is also in line with the latest FOMC projection from September and recent FOMC members’ communication.
• The IOER and ON RRP are expected to be set at 0.50% and 0.25%, respectively. Due to very large excess reserves, we expect the effective Federal funds rate to settle in the range 31bp-37bp.
• The US swap yield curve usually flattens after a hike. The 2Y to 5Y segment suffers the most, while the effect on 10Y is inconclusive.
• The USD (DXY index) usually strengthens going into the first hike and weakens thereafter. Inconclusive effect on FX volatility.”
