FOMC leaves door open for extra tightening – UOB

Researchers at UOB Group assessed the recent FOMC meeting and the prospects for higher rates in the next months.

Key Quotes

“The Jan FOMC, as widely expected, kept US monetary policy unchanged and expanded the cuts to reinvestment (as scheduled) in the Fed’s balance sheet reduction (BSR) program”.

“And while the Fed’s US growth outlook remains upbeat, the key takeaway from this FOMC was that the Fed was more hawkish on inflation expectations, raising concerns about a faster Fed policy normalization cycle in 2018”.

“Post-FOMC, our moderately hawkish outlook for the Fed rate trajectory in 2018 remains intact: we still expect three more 25bps hikes in 2018 (in Mar, Jun and Dec FOMC), bringing the FFTR to 2.25% by end-2018. We also expect continuity in the BSR program which is somewhat a 'substitute' for rate hikes, so we believe the continuation of BSR is one key factor the 2018 FOMC will take into consideration and not add more rate hikes beyond the 3 hikes unless there is a significant inflation upside surprise”.

“10-year UST yield remains drawn towards 3% post-FOMC but question of sustainability remains”.