We expect the Fed to maintain the fed funds target range at 0.50%-0.75% in line with market pricing and consensus.
As it is one of the lesser meetings without updated projections or a press conference, we will read the statement carefully for any signals of when to expect the next hike.
Unfortunately the FOMC statements are very static and usually do not change significantly from meeting to meeting so we do not expect much news. The Fed is still waiting for information on 'Trumponomics'.
We expect the Fed to hike twice this year (in June and December) with risk skewed towards a third hike. Due to the strong US economic data recently (not least the strong jobs report for December) we will look for signs of whether the next hike could come as soon as March or May.
Markets have priced in two hikes this year, which seems fair at the moment. The first full hike is priced for June. There is a 50% chance of a hike in May according to market pricing.
We expect 3-4 hikes next year, as the Fed has indicated clearly that it wants to offset Trump's more expansionary fiscal policy, although obviously much can still happen before 2018.
Markets have priced in an additional two hikes in 2018 so there is stillroom for higher rates, in our view.
The Fed signalled three hikes in both 2017 and 2018 at the December meeting.More FOMC members have commented on the Fed's reinvestment strategy lately and 'quantitative tightening' could become a market theme soon if the Fed tightens monetary policy faster than currently expected.
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