Fed still aims to 3 hikes in 2018 – UOB

Researchers at UOB Group gave their views on the prospects of further tighetening by the Federal Reserve ahead in the year.

Key Quotes

“The latest jobs report does not alter our moderately hawkish outlook for the Fed rate trajectory in 2018 as we still expect three more 25bps hikes in 2018 (in March, June and December FOMC), bringing the FFTR to 2.25% by end-2018”.

“While we remain mindful that stronger wage & inflation expectations could add to the risk of a more aggressive Fed in terms of policy normalization, the flipside is that recent US trade policy developments could warrant a more cautious Fed, at least until the cloud of trade uncertainty clears”.

“We also expect continuity in Fed Reserve’s balance sheet reduction (BSR) program and since trimming the Fed balance sheet is somewhat a 'substitute' for rate hikes, so we believe the continuation of BSR is a key factor the FOMC will take into consideration and not add more rate hikes beyond the 3 hikes in 2018. BSR will likely gain further traction in 2018, as cuts to reinvestment expand so the aggregate annual cuts will increase from US$30bn in 4Q 2017 to US$420bn in 2018 and reach steady state of US$600bn in 2019. We expect BSR to continue until the Fed balance sheet is reduced to aboutUS$2.5trillion by mid-2021”.