RESEARCH ROUNDUP: Dec Fed Hike Done Deal; Dots Won’t Change Much
(Bloomberg) -- (Adds JPM, RBC, Renaissance to item published Dec. 9.)
- Too soon for Fed officials to judge economic impact of Trump administration policies, based on published research from economists and strategists; FOMC is unlikely to alter its forecast for two rate hikes in 2017 in Wednesday’s decision, probably won’t adjust longer-term dots by much.
- Dec. 14 rate hike is seen as a virtual certainty; market- implied probabilities stand at 100%; fed funds futures fully pricing one rate hike this month; all 75 Bloomberg-surveyed economists expect a 25bp increase
- BNP, JPMorgan, Morgan Stanley are among those expecting Fed to keep 2017-2018 dots the same or little changed
- See also: Research Roundup: U.S. employment report clears way for Fed
- Bank of Tokyo-Mitsubishi (Chris Rupkey)
- December hike to be followed by one 25bp hike in every quarter through 2Q 2019; UST 10Y yield to end 2017 at 3%
- Don’t expect Yellen to continue as chair beyond the end of her current term, which ends in early 2018, given Trump statements
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- BNP (U.S. economics team)
- Fed to hike fed funds rate by 25bps; expect little guidance beyond what’s already in Fed’s projections
- Statement could include upgraded assessments in first paragraph, description of risks as appearing “balanced,” unanimous decision to hike
- No changes seen to Fed’s median dots; too early for big changes to summary of economic projections; most on FOMC will probably wait for more clarity
- “Elephant” at Yellen’s press conference is question of how Fed will respond to changes in fiscal outlook; impact remains “highly uncertain”
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- BofA (Candace Browning, others)
- Market’s expectation for Fed hikes in coming years has room to rise
- Inflation “party” has started, with core PCE expected to rise to 1.9% by end of 2017, “approaching if not overshooting the Fed’s 2% inflation target”
- Economist Michelle Meyer expects Fed to hike once in 2017, three times in 2018
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- Credit Suisse (Praveen Korapaty, others)
- Strengthening data “clearly” leaves Fed’s December hike intact
- Market isn’t pricing in enough risk of Fed hikes in 2017-2018; Trump administration is likely to have passed some fiscal initiatives by 2H 2017-1H 2018
- In phone interview, Korapaty said “we will probably get a small move up in dots;” Fed’s Dec. 13-14 meeting could be a “catalyst” for markets to start repricing number of hikes expected in 2017-2018, if Fed statement or Yellen’s press conference is more hawkish than expected
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- JPM (Michael Feroli)
- Statement will convey that risks to the outlook are balanced, take no view on prospects for fiscal policy
- Yellen to stress that it’s premature to change economic or Fed policy outlook
- No dissents expected in decision to hike
- Median dot for 2017 will continue to anticipate two hikes; JPM sees no compelling reason for major changes to 2018 or 2019 dots
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- Macquarie (Thierry Wizman)
- Base case is for hike on Dec. 14; sees at least two, possibly three moves in 2017, with the first hike in 1H
- UST 10Y yield to end 2017 at 3%; USD likely to soar on divergence between monetary and fiscal policy
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- Morgan Stanley (Ellen Zentner, Ted Wieseman, others)
- December hike to be followed by 2017 hikes next September and December, three more in 2018
- Fed will stick to its path for target rate for now as it’s still too early for central bank to build in assumptions around fiscal policy; expect a slight downward revision to NAIRU as well as longer-run neutral rate
- Market possibly pricing in a “decent probability” that median dots shift higher at FOMC meeting, though current market expectations are along FOMC’s projections
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- RBC (Tom Porcelli, others)
- Fed to offer sparse signals on future rate moves
- Unlikely to be much movement in dots; “far too early to see a reversal”
- Long-term dots to begin rising next year as FOMC reacts to higher inflation
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- Renaissance Macro (Neil Dutta)
- Fed to deliver upbeat statement, reiterate “gradual approach”
- Dots, forward rate markets appear more aligned, so there’s less risk of “sweeping changes” from FOMC
- Yellen will reiterate that economy continues to make progress toward Fed’s dual mandate
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Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Candace Browning (Bank of America Corp)
Chris Rupkey (Bank of Tokyo-Mitsubishi UFJ Ltd/The)
Ellen Zentner (Morgan Stanley)
Michael Feroli (Bear Stearns & Co Inc)
Michelle Meyer (Bank of America Corp)
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