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FOMC Review: No Major Changes To The FOMC Statement

As expected, the Fed maintained the target range unchanged at 0.50%-0.75% and made no major changes to the FOMC statement. Unfortunately, the statements usually do not change much from meeting to meeting and as this was one of the small meetings without updated projections or a press conference, we did not get any significant news on the Fed’s economic outlook or when to expect the next Fed hike. The market reaction was very muted.

That said, the Fed could have turned either more hawkish or dovish at the meeting but we have to wait for upcoming Fed speeches and/or the minutes to find out. It would not be the first time that the minutes would reveal big discussions after a ‘boring’ statement.

Based on the December meeting, the Fed still awaits more information about Trumponomics as ‘almost all’ FOMC members think there are upside risks to their growth forecasts from the expectations of more expansionary fiscal policy. Thus the ‘dots’ may be revised up next time if we get more information about Trump’s actual economic policy.

We still expect two Fed hikes this year (in June and December) but the probability of a third hike has increased due to a combination of strong US data and a more hawkish Fed at the December meeting. Given the Fed did not give any guidance on when to expect the next Fed hike, a hike already in March now seems unlikely, as the Fed has begun to prepare markets for upcoming hikes. A hike could come in May if the economy continues to surprise on the upside and markets stay calm.

Our triggers for Fed hikes this year are still 1) higher wage growth, 2) less labour market slack, 3) higher actual core inflation and 4) possible information on Trump’s actual economic policy.

Markets have priced in two hikes this year, the first one in June. The markets think there is almost a 50% probability of a hike in May.

We expect three to four hikes in 2018, as Trump’s economic policy is expected to have the biggest growth impact next year. Markets have priced in two additional hikes next year, so there is still room for higher rates, in our view.

The Fed signalled three hikes both this year and next year in the latest projections from December.

Due to technical difficulties, this is a very short and limited FOMC review without many accompanying charts. We are sorry for the inconvenience. As we only got limited information at the meeting, please see our FOMC preview: Fed is still waiting for news on Trumponomics for more information about our current Fed views.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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