All set for the last Fed hike of the year - Nomura

According to Nomura Economics Team, all looks set for a rate hike from the FOMC at the December meeting this Wednesday as well as a trend-like increase in core CPI for November.

Key Quotes

We expect a rate hike from the FOMC at the 12-13 December meeting, increasing the target range 25bp to 1.25-1.50%. Recent speeches from FOMC participants indicate that a comfortable majority of the committee is ready for a third rate hike in 2017. Inflation concerns may have eased somewhat after October’s healthy reading on core PCE inflation. Moreover, incoming economic data suggest the current strong pace of growth remains intact heading into 2018.

The October/November FOMC meeting minutes noted that “many participants thought that another increase in the target range for the federal funds rate was likely to be warranted in the near term if incoming information left the medium-term outlook broadly unchanged”.

Since that meeting, incoming information has, if anything, increased the upside risk for the medium-term outlook. Strong growth, recovering inflation and tightening labor markets, combined with the now-likely passage of the Republican tax plan, all point to sustained growth above potential over the medium term. As has been the case since October, we expect little if any language from the Committee on the balance sheet unwind beyond a note that it continues to proceed as explained in the Committee’s addendum. 

Regarding the forecasts (SEP), we expect real GDP growth forecasts for 2017, 2018 and possibly 2019 to be revised up reflecting on incoming data and an incorporation of a modest boost from tax cuts. The continued decline in the unemployment rate during the inter-meeting period will likely result in a lower projection from FOMC participants over the forecast horizon. Finally, steady growth in inflation during September and October will help keep the SEP inflation outlook essentially unchanged from the September meeting.

Some participants may revise up their rate forecasts for 2018 based on the positive economic outlook. However, given the upcoming leadership change and lingering uncertainty for the tax plan, other participants may choose to delay their revisions until next year. FOMC participants are less likely to revise their policy rate forecasts beyond 2018 materially given that they did not appear to change their views on the neutral rate nor on the appropriate degree of the policy rate overshooting its neutral level.

At her last press conference as Fed Chair, Janet Yellen will likely note that inflation remains below the Committee’s objective on a 12-month basis but she may also highlight the pickup in economic growth.