FOMC: Hike ‘does not represent a reassessment of the economic outlook’ – Danske Bank

In view of the analysts at Danske Bank, the overall message from the meeting was that the Fed is on track and delivered one of the three hikes it projected back in December 2016 -the Fed has not become more hawkish which was in line with our expectation.

Key Quotes

“In her opening remark, Fed Chair Yellen said that the decision to hike ‘does not represent a reassessment of the economic outlook’ but reflects the ‘continued progress toward’ full employment and 2% inflation.”

“Yellen also noted that the median ‘dots’ were ‘essentially unchanged’ from the last projections in December. The dots still signal three hikes in both 2017 and 2018. It is worth keeping in mind that the Fed is data dependent and will not hike unless data support the case, which it showed last year.”

“There were no major changes to the FOMC statement. The most important change was that it stated the inflation goal is ‘symmetric’, which we interpret that the Fed still wants inflation to move higher and does not mind if it overshoots the target a bit (although not persistently).”

“Yellen repeated that she estimates the current level of the real Fed funds rate is around 0%, meaning that a total of four hikes would be one too many this year, as it would make monetary policy neutral instead of accommodative. She expects it to move to 1% in coming years (3% nominal).”

“We expect the Fed to hike twice more this year (July and December) and three-four times next year. We expect the Fed to begin the reduction of its balance sheet in Q1 18.”

“Fed still awaits more information about ‘Trumponomics’ and previous meetings have revealed that ‘almost all’ FOMC members think there are upside risks to growth due to the expectations of more expansionary fiscal policy.”