Fed to hike rates by 25bp this week - RBS

FXStreet (Bali) - Brian Daingerfield, FX Trading Strategist at RBS, expects the Fed to hike the target range for the Fed Funds rate by 25bp this week, adding that the expected path of monetary policy over several years will be more critical, and probably at a slower pace.

Key Quotes

"The long awaited FOMC September meeting takes place this week and it seems that both market participants and the FOMC themselves are divided about whether the committee will take the first step toward policy normalization."

"The US economy and labour market have made continued strides towards normal levels, which is the chief factor behind the FOMC achieving “reasonable confidence” that inflation will rise over time."

"We think that will give the Fed scope to hike the target range for the Fed Funds rate by 25bp this week while emphasizing, as it has all along, that the expected path of monetary policy over several years is more critical to the overall policy stance than is the very first move."

"New external risks to the outlook may lead the FOMC to revise down its estimates for growth modestly along with a lower near-term “dot point” path for the Fed Funds rate."

"While admittedly those new risks could keep the FOMC from tightening this month, we think that the Fed can reflect those potential risks via revisions to its forecasts for growth and the Fed Funds rate while still taking a small step towards normal policy this week."

"Importantly, the FOMC’s new 2018 forecasts could show that the FOMC does not expect the Fed Funds rate to exceed neutral levels by the end of 2018, essentially signalling an additional full-year of accommodative monetary policy."

"With the market pricing a less than 50% chance of a hike this month and just 60% chance of a hike at all this year, a ‘sticker shock’ moment may be unavoidable this week."

"That leaves us still positive on the USD heading into Thursday’s meeting, despite expected Fed efforts to market and hike as a very “dovish hike”.
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