Fed: Expect four hikes this year - Natixis

Thomas Julien, Research Analyst at Natixis, now expects four hikes this year in March, June, September and December (i.e.one more than the market expects at present) and three in 2018, in March, June and September based on the idea that the Fed also will have to start normalizing its balance sheet.   

Key Quotes

“The Fed has launched a major communication campaign over the last few weeks in order to prepare the market for a rate hike on 15 March. We have, accordingly, revised our monetary policy expectations for 2017 and 2018.”

“The markets are convinced: The markets must be somewhat prepared so they are not taken by surprise (in order avoid generating volatility), which is a prerequisite for the Fed to able to act. This has now been accomplished, as the implied market probability is high enough.”

“Change of scenario for the Fed

• The first change to our scenario concerns the timing of the next interest rate increase. We now expect a 25 basis point hike following the meeting on 14 and 15 March.  
• The second change follows on from the change in the Fed’s statements, which increasingly reflect a determination to step up the pace of monetary tightening. The Fed believes it has almost reached its full employment and price stability targets and that, as a result, the time has come to normalize interest rates to avoid being behind the curve (i.e. acting too late). That is why we now expect four rate hikes this year (in March, June, September and December) and three next year (March, June and September) based on the idea that in 2018, the Fed will have to change its monetary tightening strategy policy towards a combination of rate hikes and balance sheet normalization.” 

“Note that the Fed’s consensus is around a projection of three rate hikes in 2017 and that the majority of the members (including Janet Yellen) do not factor in any change of fiscal policy. Insofar as we have taken into account some fiscal stimulus in our central scenario, a forecast of four hikes this year does not seem unreasonable.”

“For the time being we do not expect any change in the reinvestment policy before 2018, but we are awaiting further details on the balance sheet normalization process (pace of reinvestments, size of the balance sheet in the long term, timing, etc.).”