Fed to hike rates in June and December 2018 – TDS

Macro team at TDS is looking for the Fed to hike rates in June and December 2018 and suggests that this is less than what is implied by the Fed’s dot plot because they see a delayed pickup in inflation.

Key Quotes

“The market is pricing in 1.5 hikes, so there is some room for front-end rates to rise but we think that the catalyst will be a pickup in realized inflation. The extent of deficit-financed tax cuts, if any, can create some upside risk to the number of hikes. The real Fed funds rate will be close to 0% by the end of 2018 and the questions of whether short-term r* is rising and the inflation outlook will be critical for forward guidance.”

“We don’t disagree too much with the 2% terminal rate priced in by the market. We expect the Fed to continue to let the portfolio run off according to the caps, which will amount to $230bn of runoff in 2018. This can put some upward pressure on yields in the belly of the curve.”