Fed: Baseline policy rate expectation from Fed remains for two further rate rises this year – Lloyds Bank

The analysis team at Lloyds Bank explains that their baseline policy rate expectation from the US Fed remains for two further rate rises this year to 1.5%, with the next one in June, and three hikes in 2018 to 2.25%.

Key Quotes

 “The Federal Reserve Open Market Committee (FOMC) raised interest rates by 0.25% to 1.00% (upper limit) on 15th March, as expected. It was only the third increase since the global financial crisis, but it was also the second increase in only three months. The positive trend in the labour market continued, despite nonfarm payrolls increasing by only 98,000 in March. The unemployment rate fell to 4.5%, a post-crisis low, although average hourly earnings growth eased to 2.7%y/y from 2.8%y/y. Annual CPI inflation increased to 2.7%y/y in February, although ‘core’ CPI (excluding food and energy) edged down 0.1ppt but remained firm at 2.2%y/y.”

“The Fed’s preferred personal consumption expenditure (PCE) deflator measure of inflation rose to 2.1%y/y in February, although the ‘core’ measure remained below target at 1.8%y/y. The economy expanded at an annualised pace of 2.1% in Q4 2016, but early indications point to a potential softening in the pace of growth in Q1 2017. Still, we believe the underlying economic momentum remains positive and GDP growth is forecast to rise from 1.6% last year to 2.3% this year and 2.5% in 2018, with some fiscal stimulus measures assumed from next year.”

“The minutes of the meeting acknowledged that inflation is now close to target, but they specified that it needs to be “sustained”, suggesting that the pace of policy tightening will remain gradual and cautious. They reaffirmed that policymakers are comfortable with a total of three hikes this year, in line with the median ‘dot plot’ of individual policymakers. They also confirmed that discussions are taking place about the potential reduction of the Fed’s balance sheet, which may start as soon as later this year. Our baseline policy rate expectation remains for two further rate rises this year to 1.5%, with the next one in June, and three hikes in 2018 to 2.25%. We have nudged down our 10-year Treasury yield forecasts by 20bps to 2.6% at end-2017 and 2.9% at end-2018."

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