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25 Apr 2016
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.”
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.”