FOMC: Risk of more hikes in 2017, not fewer - BNPP

Analysts at BNP Paribas continue to forecast two more Fed hikes in 2017 and four in 2018, with the risks tilted towards more rather than fewer.

Key Quotes

“We also expect an announcement of balance sheet reduction plans at the end of the year for implementation in 2018. However, Chair Yellen said that they had discussed the balance sheet again at latest meeting, which makes it two meetings in a row, so we are concerned that announced action could come sooner than we expect.”

“The FOMC emphasized symmetry around its inflation goal, which is something we have already incorporated into our forecast. For example, we believe core PCE inflation will move up to 2.2% y/y this year (Q4) and even higher in 2018. In contrast, the median FOMC forecast has core PCE inflation levelling off at 2% and never exceeding that level. One way to reconcile our inflation forecast with our (rather benign) interest rate outlook is by assuming the central bank remains soft on inflation. Giving President Trump’s supply-side reforms room to influence potential growth could be one rationale for this, but the underlying logic of our forecast is that as the Fed hikes at its intended gradual pace, an inflation overshoot is almost baked in. Our view is that 2.5% is very probably the top of the Fed’s tolerance range for core PCE overshooting, however.”