Fed almost certain to hike by another 25 bp – Nordea Markets

Analysts at Nordea Markets suggest that the Fed is almost certain to hike the target range for the Fed funds rate by another 25 bp to 1.75-2.0%, while the interest rate on excess reserves (IOER) will be hiked by 20 bp, as hinted in the minutes of the May FOMC meeting, to keep the effective Fed funds rate in the middle of the target range.

Key Quotes

“A rate hike in June is fully priced in by the market and will come as no surprise.”

“Chair Powell is likely to spend some time on the symmetric nature of the Fed’s inflation target, basically telling the markets that the pace of rate hikes will not by increased in response to a mild and temporary overshooting of inflation, which is likely in the coming months. The 2% inflation target is not a ceiling, but the mid-point of the inflation target.”

“The June projections could show four rate hikes in 2018, although it will be a very close call between three and four. With five members indicating three hikes in 2018 in the March dots and five members indicating four hikes, it only takes one member changing from three to four to change the median.”

“The big if for markets is whether the dot plot will signal three or four hikes in total for 2018. A tipped balance in favour of hikes in the dot plot will likely spur a yield-positive repricing of the Fed Funds futures and likely also at least initially a moderately USD positive move in the FX space.”