Fed to further tighten the screws – NAB

Tony Kelly, Senior Economist at NAB, explains that this week the Fed lifted it’s fed funds rate target range by 25bp to 1.25-1.50%, making it three increases for the year and next year, they expect that the combination of an economy growing solidly enough to reduce the already low unemployment rate even further and a gradual rise in inflation will lead to a further three fed fund rate hikes.

Key Quotes

“The median Fed member projection is also for three rate hikes.” 

“The main risk around this call is that, despite some recent improvement, the downward surprise in inflation this year could persist into 2018. If this were to occur than at some stage the Fed would likely pause the rate tightening process.” 

“There is also upside risk to the rate track, as our projections essentially call for a slowing in policy tightening. In each of the last five quarters the Fed has tightened policy in some way (four rate hikes and, in September, it started unwinding its balance sheet). Balance sheet policy, barring some major shift in the economy, is essentially now on auto-pilot so if the Fed were to maintain this pace there would be four rate hikes. Moreover, the injection of fiscal stimulus into an economy with an already low unemployment rate may feed the fears of some Fed members about falling behind the curve.”