US FOMC Preview: Hawks and Centrists Think about More Than Two Hikes - Rabobank
US FOMC Preview: Hawks and Centrists Think about More Than Two Hikes - Rabobank
According to Philip Marey, Senior US Strategist at Rabobank, the Federal
Reserve hasstressed that the hiking cycle will be gradual and cautious,
but market expectations are undershooting the Fed’s intended rate
trajectory.
Key Quotes:
“Now that we are
heading for another weak Q1 GDP growth figure, support within the FOMC
for an April hike seems to have diminished. However, even the doves
still intend to hike twice this year. In fact, the centrists and hawks
expect to hike at least twice, but possibly three to four times.”
“In
contrast, futures markets are now pricing in one hike this year, with a
50.1% probability that it will take place in November and a 62.6%
probability that the FOMC will wait until December before hiking. For
June only a 19.6% probability of a rate increase is priced in.
Consequently, if the economy reaccelerates in Q2 the Fed may surprise
the markets with a June hike.”
“While popular thought has it that
the Fed always undershoots its dots, the December 2015 hike proved that
this is not always the case. Note that when the FOMC did not hike in
September 2015, most in the markets – but not us – thought that the Fed
was not going to hike until 2016.”
“While Fed speakers have
started pushing back against market expectations, it seems that it will
require a more concerted effort from the FOMC to realign market
expectations with the dots. A less dovish FOMC statement at this week’s
meeting would be a good start, but it will probably take a speech by
Chair Janet Yellen herself to get the job done.”
