US: Hawkish gift from Fed - Rabobank

The Fed delivered its Christmas hike, raising the federal funds rate by 25bps to 0.50-0.75% as noted by the Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“Given that such a move was fully priced in, yesterday’s meeting was all about new rate projections. As the US economy is gradually gaining momentum, the FOMC members intend to accelerate the pace of tightening to 3 hikes next year (compared to 2 hikes in the dot plot published in September). 3 moves are projected in both 2018 and 2019.” 

“At the press conference Chair Yellen attempted to downplay the upside revision to the trajectory of the rate path describing it as “very tiny”. Rabobank’s Fed watcher Philip Marey makes the case that the upward shift in the dot plot may be a less significant shift in the FOMC’s views than it would appear. He also remains sceptical that the Fed will be able to raise rates on three occasions next year.” 

“The markets, however, interpreted the overall message from the Fed as relatively hawkish as reflected in a sharp squeeze in yields on US Treasuries. With the 10-year setting a new year-to-date high at 2.5836%, the DXY Index rallied to the highest level since 2003 trading as high as 102.59 as the US dollar firmed across the board. Traders were unable to wear “Dow 20,000” caps as the DJIA ended yesterday’s session 0.6% lower at 19,792.53. The S&P 500 fell 0.8% to 2,253.28 following impressive gains since the US presidential election.”

“While the prospect of a faster pace of Fed tightening weighed on risky assets, the MSCI emerging markets index held above the key pivot at 870~. Amongst the EM currencies the Turkish lira is one of the most vulnerable due to Turkey’s reliance on capital inflows to finance C/A deficit. Turkey’s central bank may have to raise interest rates further to support the lira.”