As expected, we did not get much new from the FOMC minutes. The FOMC members think the economy continues to improve but that 'Trumponomics' make the outlook more uncertain.
Although 'many participants' expect a hike 'fairly soon', only 'a few participants' expect a hike 'at an upcoming meeting'. This supports our view that a March hike is unlikely.
As the Fed and the markets are waiting for 'Trumponomics', we will listen carefully when President Donald Trump speaks to a joint session in Congress on Tuesday.
We still expect the Fed to hike twice this year (in June and December), with the risk skewed towards a third hike. Markets have priced in two hikes this year.
We expect three to four hikes next year, as the Fed has indicated clearly that it wants to offset Trump's more expansionary fiscal policy. Markets have priced in an additional two hikes in 2018, so there is stillroom for higher rates, in our view.
'Quantitative tightening' is beginning to become a market theme, as the minutes reveal that the FOMC members want to discuss the reinvestment strategy at one of the upcoming meetings. In our base case with two to three Fed hikes this year, we expect the Fed to continue reinvesting matured securities this year. However, the Fed may begin to reduce its balance sheet in the first half of next year.
Note that President Trump has to nominate three Fed governors in the coming months, as Daniel Tarullo has announced he will step down on 5 April. While Trump has expressed different views on monetary policy, we think it is most likely that he will appoint hawkish governors.
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