Fed to hike in December – Danske Bank
|Analysts at Danske Bank suggest that their base scenario is that the Fed will hike in December, mainly because the Fed puts more weight on labour market data relative to inflation.
Key Quotes
“However, as we already mentioned after the June hike, a December hike is a close call and we estimate the hike probability to be 55% currently, as inflation remains low despite the stronger-than-expected CPI data for August. That is why since the June meeting, we have argued that risk is skewed towards the Fed pausing its hiking cycle due to low inflation, which may not be just ‘transitory’ given the low inflation expectations. In our view, the problem is that the tightness of the labour market is not the only factor determining wage growth, as second-round effects after many years with low inflation have hit wage growth.”
“When employees expect inflation to remain low, they can live with low wage growth, as real wage growth may still be solid, making it less likely inflation will reach the target. In this regard, it is interesting that four FOMC members indicated that they do not expect the Fed to hike more this year in the June projections. Markets price in a December hike with a 45% probability. Less than 1.5 hikes are priced in by the end of next year.”
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