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FOMC statement: are there hesitations about rate hike?
There is a huge agiotage around today’s FOMC meeting. Investors are highly sure that the interest rate will be increased, however, they are looking for more comments on the future rate hikes.
Although the Fed has forecast three rate hikes this year, investors do not hold out a hope of the fourth increase. Beliefs in the bigger number of rate hikes lie in the economic growth. While home sales and retail spending figures recently were weak, the overall economic picture has developed this year. Inflation managed to strengthen after being below the Fed’s target for more than five years, also there were more hints of wage gains.
As it is the first policy meeting under Chairman Jerome Powell, investors want to hear his assessment of the US economy and future monetary policy. Inflation developments may make the speech more upbeat, however, weaker consumer spending can cool the Fed’s mood.
Let’s look at forecasts on the Fed’s meeting.
Based on the projections, all economists expect the interest rate to increase by 25bp today.
The Deutsche Bank predicts little changes in a Fed’s message about economic activity. DB’s economists believe that the central bank will raise their growth forecast and cut unemployment forecasts. As a result, the Deutsche Bank expects Fed message to highlight an overheating economy and the right path of the Fed’s tightening actions. The next hike is anticipated in June. Talking about the fourth rate hike, the economists expect that the forecast will move up this year.
As well as the Deutsche Bank, the Barclays Research Team anticipate stronger inflation and weaker unemployment rate forecasts. Based on the sizable fiscal stimulus, the Fed is likely to increase growth expectations, particularly for 2019. As about the interest rate, the Barclays’ economists expect the Fed to raise interest rates hikes from three to four at the June meeting.
Danske Bank is for three rate hikes this year. Although they anticipate that the median dot will show four rate hikes, they base such result on the less number of voting doves. Considering a forecast on 2019, the bank anticipates three instead of two rate hikes. So the rate will be at 3.0% by the end of 2019.
Despite the fact that Mr. Powell sounded more hawkish at his hearing before Congress, they do not expect many changes to the statement. More likely, the Chairman will repeat that the risks are roughly balanced and the central bank expects a further gradual increase.
Analysts at Nomura base their opinion on Powell’s first testimony, where he said that “outlook for the economy has strengthened since December.” So the Nomura expects the Chairman to upgrade his outlook for growth and labor markets. The increase in the interest rate’s forecast for 2018 and 2019 years is anticipated as well.
To sum up, we can say that there is a small chance that the Fed will not increase the interest rate today. The developing economic data highly support rate hikes. More likely, the Fed will increase the number of hikes this year, however, it can leave such announcement until the June meeting. The central bank is anticipated to highlight resilient economic data, supportive financial conditions, strong foreign growth and changes in fiscal policy.
Although there are no doubts that the Fed will increase the interest rate, the greenback is falling. If Powell’s speech is hawkish, the US dollar has chances to strengthen. However, worries about trade wars have a negative impact on the greenback. So the Fed’s policy should be as hawkish as possible to support the US currency.
Oil is always the hottest topic. Other markets may be steady, however, the oil one never is.
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