FED Tipped To Hike December 2018 And 4 Times In 2019

REACTION: In a post-FED brief to clients on Friday, badysts at Barclays said “Language changes in the FOMC statement were minor and factual. Barclays Research continues to forecast the next rate hike in December, followed by four more hikes in 2019.”

UPDATE: “The US dollar exchange rate are a little firmer on the day as all eyes focus on the upcoming FED policy statement, widely anticipated to be unchanged.

According to badysts at Scotiabank “No change in rates is expected, leaving the target range a 2-2.25%, but the Fed’s policy statement (there is no press conference) will be closely watched for clues on future tightening moves. A Dec hike is expected (and more beyond that) despite the recent comments from President Trump which have clearly suggested unease with higher interest rates. We expect messaging to leave the door wide open to further hikes but any sign the Fed is rethinking the broader pace of tightening would be a clear USDnegative.

Fed Funds Rate Expected to Stay the Course

With the US midterms causing headline-bound spikes of volatility but ruffling few feathers in the bigger picture, the focus now shifts to the upcoming FOMC statement release and Federal Funds Rate, due for release at 7pm this evening (GMT). This morning’s session has seen USD FX pairs moving generally sideways in anticipation of tonight’s releases.

Whilst Trump has in the past been critical of the Fed’s increasingly hawkish tone, a surprise Fed rate hike to appease the POTUS seems unlikely. In the wider fundamental picture, labour market statistics, month on month, showed support for growing economic health for the USD but consumer market health, inflation, manufacturing and the housing market paint a bearish/neutral picture meaning a decision to leave the rate unchanged at 2.25 seems likely, or at least an early rise very unlikely.

If anything the general consensus seems to indicate that the “FOMC statement will either remain unchanged or be a tad more cautious” a view held by BK Asset Management’s, Kathy Lien. In terms of market impact, the lack of a press-conference after the Federal Funds Rate, in the past hinting at ‘newsworthy’ revelations therein, has historically preceded a distinct lack of market impact.

Institutional expectations for the Fed Funds Rate seem to be generally aligned with Danske Bank’s projection being of a static release “We do not expect the Fed to hike the Fed funds rate tonight at 20:00 CET (7pm GMT)… As it is one of the interim meetings without updated projections and a press conference, we do not expect Powell & co to make big changes to the policy signals in the statement.” Going on to explain their outlook for the near term as “We think the Fed will wait until December and then hike the target range by 25bp… In our view, the Fed is on track to raise the Fed funds rate to 3%, which is the neutral rate, where monetary policy is neither expansionary nor contractionary. This will happen in June (hikes in December, March and June).”

Lloyds outlook for the FOMC releases is in agreement, “the US economy continues to fire on all cylinders… Such strength will give the Federal Reserve confidence to continue its process of monetary policy normalisation” as well as for the near-term “ the US Federal Reserve is on course to raise rates in December to 2.5%. We continue to see two further increases next year to 3%”

Interestingly the institutional projections for the near-term USD value in the foreign exchange markets do not fall into agreement, with Lloyds forecasting “the GBP/USD and GBP/EUR at 1.35 and 1.14 by the year-end, implying a higher EUR/USD at 1.18” with the relative fall in the dollar attributed to an undervalued Euro and anticipated progress in a Brexit transition deal.

This is in stark contrast with Danske Bank’s outlook for the EURUSD in which they “maintain that carry and cyclical support will keep USD bid into year-end, as notably the support from real rates is set to stay in place” .

As it stands the Fed Funds Rate currently sits at 2.25% with the expectation of a .25% hike per quarter.