FOMC determined to deliver third rate hike - Rabobank

In view of Philip Marey, Senior US Strategist at Rabobank, although puzzled by this year’s decline in inflation when unemployment has dropped below its own estimate of the NAIRU, the FOMC seems determined to deliver its third rate hike of the year on December 13. However, by trying to squeeze in a third hike before the end of the year they may also reduce the probability of delivering three hikes next year, he further adds.

Key Quotes

“The Fed seems intent on hiking in December, despite admitting that it does not have a clue why inflation remains absent. In fact, it is clinging to the belief that wage and price pressures will strengthen as slack in the labor market continues to decline. Of course, delivering a third hike before the end of the year would fulfill the Fed’s promise contained in the dot plot for the first time since the start of the hiking cycle. In 2015 and 2016 the Fed had to backtrack on its promises, so now they seem intent on restoring the credibility of the dot plot.”

“Therefore, at the meeting on December 12-13 we expect the FOMC to change the target range for the federal funds rate to 1.25-1.50%, from 1.00-1.25%. Since this hike has been well telegraphed by the Fed, markets are likely to focus on the fresh set of projections, in particular the dot plot. Do the FOMC participants still expect to hike 3 times in 2018? The meeting will be concluded by Chair Yellen’s final post-meeting press conference. Since she will leave the Fed in early February, her words may not carry the weight that they had previously.”