Fed will probably remove more of its forward guidance to increase its flexibility - Danske Bank

Mikael Olai Milhøj, Senior Analyst at Danske Bank, sees the Federal Reserve raising rates next week and considers it could implement changes to the forward guidance. 

Key Quotes: 

“We expect the Fed to raise rates again when the committee meets next week. This would bring the target range to 2.25-2.50%, i.e. the lower end of the broad range of the estimates of the neutral rate according to the September dots (2.5-3.0%, with most saying 3.0%).”

“While we think the Fed’s base case remains that the gradual hiking cycle will continue a bit further, the Fed will probably remove more of its forward guidance to increase its flexibility (as it did in June), as risks to the rate outlook become more two-sided with the Fed funds rate in the broad neutral range.”

“Do not be surprised if the Fed removes that it ‘expects further gradual increases in the target range’ from the statement. It makes sense to get rid of the one-sided rate outlook, as monetary policy becomes more neutral.”

“We think the Fed will continue to signal three hikes next year but see risks that the 2020 and 2021 dots are lowered. The longer-run dot is likely to be unchanged at 3.00%.”

“When 3% is reached, further hikes will be more ‘stop and go’ depending on how the economy is doing. Our Fed call means markets are pricing the Fed too dovishly at the moment.”