FOMC to raise targets for short-term interest rates - Nomura

At its 12-13 December meeting, analysts at Nomura expect the FOMC to raise targets for short-term interest rates for the third time this year, which will bring the RRP and IOR rates to 1.25% and 1.50%, respectively.

Key Quotes

“This policy change has been well telegraphed over the past several months as participants have frequently acknowledged continued economic momentum, tightening labor markets and, over the past two months, increased evidence that the inflation weakness earlier this year was likely transitory.”

“Consistent with sustained economic momentum and strong incoming data during the September-December inter-meeting period, we expect real GDP growth forecasts for 2017, 2018 and possibly 2019 to be revised up. The unemployment rate for November, at 4.1%, sits a comfortable 0.2pp below September’s end of year SEP forecast for 2017. Thus, we expect the Committee to lower its median unemployment rate forecast not only for 2017 but also later years as well, including the longer-run. Finally, steady growth in core PCE inflation readings from September and October indicate that the SEP inflation forecasts are likely to remain unchanged at the December meeting.”

“The distribution of the dots in the December SEP contains a higher-than-usual amount of uncertainty, in our view. Strong incoming data with positive momentum combined with the increased likelihood of a fiscal impulse via tax cuts will likely prompt some participants to pencil in more hikes in 2018 than they had expected at the September meeting. However, at the same time, the upcoming leadership transition as well as lingering uncertainty around the composition and trajectory for changes in Federal taxes and spending could give enough members pause to keep the current 2018 outlook of three hikes unchanged. Reflecting this increased uncertainty, we expect the distribution of the 2018 dots to shift up but that the median will fall between three and four hikes. This implies that, with 16 participants, the median, conventionally measured, will be 2.250%, the average of 2.375% (four hikes) and 2.125% (three hikes, its current level).”