Halister News

(Bloomberg) -- Financial conditions now easy enough to move forward with March hike; updated dollar projections alongside core PCE tracking call for three hikes in 2017 (vs two previous) and four in 2018 (vs three), Morgan Stanley economists led by Ellen Zentner write in note

• USD forecast change sees 3% lower path, adding upwards pressure on GDP and inflation outlook and worth an additional Fed rate hike over 2017-2018
• Net easing in financial conditions since December FOMC equates to ~75bp rate cut
• Also raising PCE inflation est. to 2% from 1.9% over 2017 and 2018
• Dudley’s comments that a rate hike has become more compelling “could not be ignored”
• If hike in March also includes further upwards revision to 2017 median dot, see intermediates pressured, 2s5s steeper and 5s30s flatter; no revision to median dot may see overall yield curve steepen, strategist Matt Hornbach writes
• Medium-term uncertainty, notably fiscal outlook “not enough to paralyze the FOMC and keep it from acting now”
• Expect Fed to reduce SOMA portfolio once policy normalization “well under way,” or when the Fed funds rate is halfway to longer-term equilibrium 3% rate; “risks to an earlier drawdown have risen” and MBS reinvestments could come to an end in January 2018 vs original estimate for April 2018
• NOTE: Morgan Stanley had seen next hike in September, see Feb. 15 story