We expect the Fed to raise the Fed funds target range 25bp to 0.50%-0.75% from the current 0.25%-0.50% at the FOMC meeting next week, in line with both consensus and market pricing.
Since everyone expects a Fed hike, the most interesting question is how many Fed hikes to expect next year. We expect the median 'dots' to stay unchanged signalling two hikes in 2017 and three in 2018.
We see a chance that the longer-run median 'dot' will be revised down to 2.75% from 2.88% currently, as it only needs one FOMC member currently indicating an end rate of 3.00% to revise down for the longer-run median 'dot' to be revised down as well.
It is important to remember that the Fed turns more dovish next year due to shifting voting rights.
We expect the Fed to hike twice a year, i.e. a total of five hikes from now until year-end 2018 (including the likely hike next week) as the doves will only partly offset the expected fiscal boost from Donald Trump in order to let inflation overshoot the 2% target. To be specific, we expect the Fed to hike in June and December next year. Markets now price close to four and a half hikes from now until year-end 2018.
We think the three most important triggers for Fed hikes next year are 1) Higher wage growth, 2) Lower unemployment rate and 3) Higher actual PCE core inflation.
As markets seem fairly priced right now, we do not expect major changes to the Fed pricing. If anything, we could see a small disappointment, if the Fed (as we anticipate) does not revise up its median 'dots', which could be seen as a dovish hike.
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