Well, all eyes are on the Fed tomorrow, but by all accounts there’s really no reason why they should be. The general consensus is that investors can just sleep through this one as there’s a near 100% chance of a hike.
The question going forward is how the FOMC responds to market expectations for stepped up economic growth and inflation under a Trump administration. The prevailing view is that the Fed will move to hike rates further in 2017 or else risk falling behind the curve. Here’s Goldman’s outlook:
UBS is out with an interesting note on Tuesday which reminds us that it won’t take much for the infamous “dots” to shift. Here’s Bloomberg with a summary (emphasis mine):
Current distribution of FOMC’s median dots suggests risk of an “implied faster pace of tightening across the entire forecasting horizon,” UBS economists Drew Matus, Samuel Coffin and Dave Liang write in note.
- Only two policy makers would need to move their 2017-2019 outlooks higher to produce a higher median
- Long-run forecast could move if just one forecast shifts between a 2.75%-3% rate
- NOTE: Few dots could move higher, Matus said separately in Bloomberg Television interview Tuesday
- Upward revisions to growth and/or inflation outlooks may signal FOMC members’ views about impact of any fiscal stimulus
- A decision to describe near-term risks as “balanced” in statement could suggest next rate hike is “some time off in the future” rather than imminent
- Statement should note rise in inflation expectations and greater optimism about labor market, while sticking with “gradual” approach to future moves
- Expect fed funds and discount rates to rise by 25bps each, to 0.5%-0.75% and 1.25%, respectively
- Yellen won’t stray from FOMC statement during her press conference
- While 2017 will see shift to more dovish voting members, FOMC will follow through with two hikes, with risk of more
- Number of appointments to Fed board should be made, including Yellen’s likely successor, who will probably be more hawkish; “that would likely make the FOMC as a whole more hawkish”
- NOTE: Matus tells Bloomberg TV he sees “zero chance” of Yellen remaining as Fed chair