Fed to raise above the 2.75% long-run dot
We now expect the Fed to raise the Fed funds rate above the longer-run dot of 2.75% (Fed's estimate of the natural rate of interest when the economy is normalised) in coming years. We also now expect three hikes in 2019 (previously two) and could see the hiking cycle continue into 2020. Hence, we disagree with the markets, as the markets believe the Fed will soon be finished with hiking, as only 1.25 additional hikes are priced in next year. We believe the Fed thinks it is time to hit the brakes, as fiscal policy has become more expansionary and the output gap is nearly closed.
No change in our ECB view
We forecast growth of 2.0% in 2018 and 1.9% in 2019 in the eurozone. However, we still do not expect the first rate before Q2 19, as inflation pressures remain subdued. We expect core inflation to stay marginally above 1% for most of 2018 but also not to accelerate much further from here without higher wage growth. That said, the ECB Governing Council is becoming increasingly confident that inflation will eventually increase and meet the inflation objective, and anything but an end to QE either in September or December would be a big surprise. But it does not mean that a first rate hike has moved closer. We still see no ECB hike before Q2 19.
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