Fed: Four more increases expected in 2018 – Deutsche Bank

Analysts at Deutsche Bank suggest that four more Fed increases are expected in 2018 as officials grapple with the causes of recent low inflation.

Key Quotes

“Fed policy decisions are being made in the presence of strong countervailing forces

• On the hawkish side are solid growth, a tight  labour market, and loose financial conditions
• On the dovish side are softer inflation and a belief the neutral fed funds rate (r-star*) is low”

“In 2018, we see four rate hikes

• the first in March
• but inflation developments will be crucial
• Fed is having an open debate about the sources of low inflation
• temporary factors versus structural disinflationary forces (e.g., innovation)
• We expect more convincing signs inflation is rising, pushing Fed to hike more aggressively”

“We expect three hikes in 2019, pushing the fed funds rate above 3%, with unemployment near 3.5% and inflation slightly above target”

“Alternatives to 2% inflation target being discussed, as a low r-star means monetary policy will be more  frequently restrained by near-zero rates in the future”