FOMC may continue to indicate that it intends to hike three times this year - Rabobank

Analysts at Rabobank point out that for now, the FOMC may continue to indicate that it intends to stick to its plan to hike three times this year, but if inflation continues to undershoot the Fed’s target and expectations, the doves in the Committee are likely to get nervous.

Key Quotes

“We continue to think that the Fed will only hike twice this year. Note that this could also delay the Fed’s plan to reduce its reinvestments until next year.”

“In addition to the inflation outlook we continue to see a series of downside risks to the US economy that each by itself could make the Fed stop in its tracks.”

“On the home front, ‘Trumpgate’ is making it even more difficult to make fiscal policy. Progress was slow to begin with: the Congress produced a spending bill to keep the government open through September, but the health care bill is still in the Senate. The Republicans are still working on tax reform, while we have also seen little progress on infrastructure spending. Therefore, we continue to think that the much awaited fiscal stimulus is likely to disappoint in terms of timing, size, and impact.”

“From the start we have expressed our doubts about the Trump rally and in particular the anticipated progress on fiscal policy that supported it and events in Washington are increasingly confirming our long held view. Moreover, if we are right about the Fed getting ahead of itself – not having been able to resist the animal spirits – the correction could be even more painful.”

“What’s more, if President Trump starts to follow through on his trade policy threats in order to compensate for the lack of progress on fiscal policy, we are heading for trade conflicts that would have negative effects on both the US and global economy. If we look outside the US, the Chinese economy remains a cause for concern. Meanwhile, geopolitical risk has increased in recent months.”