Hawkish Yellen ignores inflation and weaker data

• We were obviously wrong about our non-consensus call that the Fed would skip hiking at this meeting. However, we are surprised that the Fed is not more worried about low inflation. We still fear the Fed is making a policy mistake, as economic data do not justify a hike, in our view.

• Unchanged dots but four FOMC members expect no further hikes this year – and we guess three of them are voting members. This puts a third hike this year into question.

• Fed may hike again in December, as it targets unemployment but risks are skewed toward a pause in the hiking cycle, so we expect a maximum of 1-2 hikes next year if anything. More details on quantitative tightening (QT) may come already in September so actual QT can start in Q4.

• Fed plans to shrink the balance sheet by USD300bn the first year and USD600bn per year afterwards, which may be too optimistic in our view. There is a risk that a perfect storm will hit USD liquidity in H2 17.

• A combination of a more dovish Fed and a more hawkish ECB towards year-end may be the catalyst for unlocking the EUR/USD upside potential.

s very much expected by everyone else than us, the Federal Reserve hiked its target range by 25bp to 1.00%-1.25%. As we wrote in our preview, we are not surprised that the Fed hiked given the very high expectations but we are surprised that the Fed is not more worried about recent inflation prints, as both CPI and PCE inflation are now below 2%. While the Fed still says it monitors inflation ‘closely', Yellen was more hawkish during the press conference, as she said one should not over-interpret the recent fall in inflation rates, which she referred to as ‘noise' - this despite the fact that the Fed has failed to achieve its 2% inflation target the past eight years when looking at PCE core inflation.

Download The Full Flash Comment