FOMC Preview: Hiking through the trade wars - Rabobank

"The September meeting of the FOMC is expected to have a full agenda: a hike in the federal funds rate target range, a matching raise in the IOER rate, the next step in balance sheet normalisation, and an update of the projections, including the dot plot," Rabobank analysts note.

Key quotes

"The September hike in the target range for the federal funds rate is likely to be a full one, i.e. to be accompanied by a 25bp rise in the IOER. Meanwhile, the September meeting should also lead to the next step in the balance sheet normalization program that was announced in September last year." 

"Our forecast of 3 hikes for this year has become increasingly challenged. While the June dot plot revealed a delicate 8-7 balance of the dot plot in favour of 4 instead of 3 hikes this year, the strength of economic data for Q2 and Q3 may have shifted that balance in favor of 4 hikes in the new dot plot, this month. For now, we stick to our forecast of 3 hikes this year, but if the Fed remains sanguine about the escalating trade wars a fourth hike becomes more likely."

"The FOMC did debate the risk of inverting the yield curve at the July 31-August 1 meeting, with several doves citing statistical evidence that yield curve inversions have often preceded recessions. However, the hawks emphasised that downward pressure on term premiums from central bank asset purchase programs and the strong worldwide demand for safe assets made this time different. Given that the hawks have the upper hand in the FOMC, the risk of the Fed inverting the yield curve certainly cannot be ignored."