FOMC Rate hikes: Two more in store - HSBC

The FOMC raised the federal funds rate by 25bp, a well-flagged move that was priced in by the market and more important than rate hike, were the changes in the FOMC’s Summary of Economic Projections (SEP) notes analysts at HSBC.

Key Quotes

“The SEP showed that several Fed officials lifted their estimate for the appropriate level of the federal funds rate at the end of both 2017 and 2018. The median projections for both 2017 and 2018 were unchanged, but the average level of the projections moved higher. This suggests that there is now more solid support on the Committee for three rate hikes this year. Given the change in sentiment among FOMC members, we are changing our forecast. We now expect two more 25bp rate hikes in 2017, one in June and another in September, versus a previous call of one more hike in September.”

“After the September rate hike, we expect that the policymakers will pause to assess the effects of the tighter monetary policy on the economy. We continue to expect another rate hike in March 2018. After that, we would expect the FOMC to start reducing the size of its balance sheet by allowing some of its securities holdings to run off as they mature.”

“US rates strategy: We maintain our view that the near-term range for 10-year US Treasury note yields should be in the 2.2-2.5% area.”

“FX strategy: The knee-jerk move in the FX markets is already proving notable, with G10 and gold rising against the USD. It will be particularly interesting to see if EM FX can sustain its advance.”

“US credit strategy: With the Fed committed to a deliberate pace of rate hikes, we expect recent expressions of risk aversion to subside and total returns to steadily recover the losses seen since 1 March 2017.”

“Emerging markets: We believe EM can handle a moderate Fed tightening pace as long as China and other large EMs stay on a stabilization/acceleration path, and risks related to potential DM policy and a focus on curbing trade remain contained.”

“Equity strategy: This will likely be a more gradual Fed cycle than those seen historically, but it is starting with a more extended earnings cycle, and with valuation multiples at their highest level outside of the tech bubble.”