Fed: Next rate hike expected in December - Danske Bank

Following yesterday’s FOMC meeting, analysts from Danske Bank, expect another rate hike from the Federal Reserve in December. 

Key Quotes: 

“As expected, the Fed maintained the target rate at 1.00%-1.25%. As this was a small meeting without updated projections and a press conference, focus was solely on the statement. However, the statement was without any big changes as per usual.”

“One change in the statement was that it now says that the process of unwinding the balance sheet may start ‘relatively soon’ instead of ‘this year’, but in reality this was not new as it just reflects the words Fed Chair Yellen used during the press conference in June. We think this supports our call that the Fed will make an announcement on quantitative tightening at the next meeting in September.”

“Another change was that it now says that inflation runs below 2% instead of ‘somewhat below’, which was a smidgen dovish. It is difficult to say whether it is something we should pay a lot of attention to, as we know, based on Janet Yellen’s recent testimony to US congress, that the Fed still has faith in the Phillips curve, i.e. the tighter labour market will push wage growth and thus underlying inflation higher eventually. Due to the Fed’s strong belief in the Phillips curve and given we expect a further tightening of the labour market, we think the Fed will hike one more time this year in December. Consensus is for another hike this year, while markets price in a 40% probability.”