FOMC widely expected to bring a 25 bp hike in the Federal funds rate - Rabobank

The FOMC’s 2 day meeting is widely expected to bring a 25 bp hike in the Federal funds rate on Wednesday, suggests Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“Arguably of more interest, however, will be the Committee’s assessment of the recent run of mixed data and whether this is sufficient for the Fed to be less confident about the prospect of a third rate hike later in the year.  It is our view that a rate hike this week will be followed by steady policy through the remainder of the year.”

“We see scope for the FOMC to make a downward revision to its PCE inflation projections which in March suggested 1.9% for both the headline and core measure in the final quarter of this year. Note that in April the PCE deflator fell to 1.7% while the core measure fell to 1.5%. Back in February headline inflation was 2.1% and core inflation 1.8%. This shows that we are currently moving away from the Fed’s 2.0% target for PCE inflation, which could delay the Fed’s intended third hike of this year until 2018.  Weaker inflation could also influence any decision by the FOMC regarding a reduction in the Fed’s USD4.5 trn balance sheet.  Some FOMC have been suggesting that the Fed could start to reduce the size of the balance sheet by year end.  This assessment, however, assumed a third rate hike in 2017.”