Analysts at Rabobank explain that the minutes of the January FOMC meeting showed increased confidence in the economy, we should therefore expect moderate upward revisions to the outlook for GDP growth and inflation.
“Powell’s testimony confirmed this optimism and he strongly hinted at four rate hikes this year, but we wonder whether he has the gravitas to immediately change the consensus view.”
“Now that the output gap has closed – or is at least about to – the tolerance for the FOMC to allow an overshoot in procyclical inflation to correct for ‘temporary factors’ has diminished.”
“We do, however, see a risk that the FOMC would then get ahead of itself. Some flattening of the yield curve is natural when the central bank pushes up the short-end of the curve, but if the Fed relentlessly pursues its ultimate target of policy normalization, there is a risk that its policy – and expectations of future policy – actively invert the yield curve, especially when actual inflation readings continue to fall short of the FOMC’s target.”
“An inversion of the curve would certainly hurt the FOMC’s confidence, which may force them to take a pause. We therefore expect three rate hikes this year: in March, June and September.”
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