Research Team at Lloyds Bank suggests that their baseline Fed policy rate expectation is for two further rate rises this year to 1.5% (previously 1.25%) and three hikes in 2018 to 2.25% (previously two hikes to 1.75%).

Key Quotes

“We have nudged up our 10-year Treasury yield forecasts by 10bps to 2.8% at end-2017 and 3.1% at end-2018.”

“The Federal Reserve Open Market Committee (FOMC) raised interest rates by 0.25% to 1.00% (upper limit) on 15 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 move was widely anticipated, following strong signals from policymakers and positive economic data. Attention turned to policy prospects for the rest of the year and beyond. Based on the updated ‘dot plot’ of individual policymakers, there was no change to the previous median projection of three hikes this year, but there was a greater skew towards more rate rises than before. Nevertheless, the Fed’s economic projections were broadly unchanged and, while the statement acknowledged that inflation is now close to target, it specified that it needs to be “sustained”. Overall, the Fed appeared to pull back slightly from the recent hawkish signals that it gave ahead of the March meeting and is comfortable with its signal of three hikes this year.”

“The US labour market continued to show signs of strength. Nonfarm payrolls increased by 235k in February, exceeding expectations, while the unemployment rate fell to 4.7% and average hourly earnings growth moved up to 2.8%y/y. Headline CPI inflation for February increased to 2.7%y/y, while the ‘core’ measure (excluding food and energy) edged down to 2.2%y/y. The Fed’s preferred PCE deflator is released at the end of the month, with the ‘core’ measure for January at 1.7%y/y, still below the 2% target. The impact of the new administration’s economic policies remains uncertain, as details on fiscal stimulus and external trade plans are still limited.”

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