23 Dec 2015
Fed: Getting started but will it have the desired effect? – Danske Bank
FXStreet (Delhi) – Research Team at Danske Bank, notes that exactly seven years after the FOMC lowered the federal funds rate to 0-0.25%, it raised the rate by 25bp to 0.25-0.50%, which concluded the G10 interest rate decisions in December including in our backyards of Sweden and Norway.
Key Quotes
“Interestingly, all G10 central banks with the exception of Bank of England (BoE) have been less dovish than expected. This suggests that central banks are less worried about the deflationary risks from the collapsing oil price than what many have expected. Markets initially took the Fed hike well, which reflects that it was the ‘best flagged’ in history. The Fed rate hike removes uncertainty from the market, which is a positive thing, particularly for markets that have been pressured by Fed rate hike expectations such as emerging markets (EM). However, the question remains whether it will be better in the future.
“On Fed, the outcome was broadly in line with our and market expectations. We note that the ‘mean dots’ were moved down by around 19bp in 2016 compared to the September meeting despite the ‘median dots’ being unchanged. In addition, most of the voting members in 2016 will be dovish-to-neutral despite more hawkish regional Fed presidents becoming voting members next year.”
“We stick to our view that the Fed will hike three times in 2016 and four times in 2017, i.e. a total of seven hikes until year-end 2017. In light of this, we find the current market pricing too soft. The market is pricing Fed to hike in June and in December 2016. This leaves only two full hikes priced in for 2016 and an additional two priced in for 2017. We expect the Fed to hike in April, September and December next year.”
Key Quotes
“Interestingly, all G10 central banks with the exception of Bank of England (BoE) have been less dovish than expected. This suggests that central banks are less worried about the deflationary risks from the collapsing oil price than what many have expected. Markets initially took the Fed hike well, which reflects that it was the ‘best flagged’ in history. The Fed rate hike removes uncertainty from the market, which is a positive thing, particularly for markets that have been pressured by Fed rate hike expectations such as emerging markets (EM). However, the question remains whether it will be better in the future.
“On Fed, the outcome was broadly in line with our and market expectations. We note that the ‘mean dots’ were moved down by around 19bp in 2016 compared to the September meeting despite the ‘median dots’ being unchanged. In addition, most of the voting members in 2016 will be dovish-to-neutral despite more hawkish regional Fed presidents becoming voting members next year.”
“We stick to our view that the Fed will hike three times in 2016 and four times in 2017, i.e. a total of seven hikes until year-end 2017. In light of this, we find the current market pricing too soft. The market is pricing Fed to hike in June and in December 2016. This leaves only two full hikes priced in for 2016 and an additional two priced in for 2017. We expect the Fed to hike in April, September and December next year.”