FOMC to deliver, immediate impact on USD to be relatively neutral - CIBC

According to Royce Mendes, senior economist at CIBC, the most likely outcome of the FOMC meeting, is that investors get what they were expecting, leaving the immediate impact on rates and the dollar relatively neutral.

Key Quotes: 

“A rate hike from the Fed won’t be earthshattering news tomorrow. Growth has outpaced potential this year, core inflation is running at target, and standard estimates of trade war impacts remain relatively contained. As a result, policymakers have guided investor expectations toward a 25bp increase in the fed funds rate tomorrow, leaving little reason for market moves on the back of the rate hike alone.”

“Risks heading into the event are somewhat skewed to the dovish side. Indeed, it would take fewer changes to see some of the median interest rate forecasts moving slightly lower than what would be needed to see an upside move. Nevertheless, the most likely outcome is that investors get what they were expecting, leaving the immediate impact on rates and the dollar relatively neutral.”

“Markets are already priced for two more rate hikes this year — including one tomorrow — and another couple in 2019. The expected deceleration in the pace of rate hikes come next year is slightly more dovish than the FOMC projections, but is consistent with our forecast that policymakers take a breather at some point to assess the economy’s response to higher rates.”

“With markets well placed for upcoming Fed moves until the end of 2019, Treasury yields over the medium term will rise only gradually, dragged higher by an increasing global supply of longer-term bonds (the result of unwinding the Fed’s balance sheet, additional issuance in the US, and a pullback of QE in other jurisdictions). For the dollar, the lack of support from rate hikes will leave it susceptible to weakness from the wide US current account deficit as well as the turn away from aggressive monetary easing in other jurisdictions.”