Fed is widely expected to raise federal funds rate by 25bps to 1.75-2.00%. Fed fund futures are pricing in 96.3% chance of that and there is no way for Fed to disappoint.
The main question is on firstly, whether Fed in on course for another hike in September. And, would Fed hike the fourth time this year in December? Fed fund futures are pricing in 75% chance of a hike in September 2.00-2.25%, but less than 50% chance for December hike to 2.25-2.50%.
Market pricing could change drastically based on revision to Fed’s economic forecasts. To recap, back in March, Fed projected growth to be at 2.7% in 2018, to slow to 2.4% in 2019 then 2.0% in 2020. Unemployment rate is projected to be at 3.8% in 2018, dropped to 3.6% in 2019 and stay there in 2020. That is, Fed only expected the tax cut to have temporary boost to the economy. And based on recent economic data, Fed is not too likely to change these projections.
Headline CPI is projected to be at 1.9% in 2018, 2.0% in 2019 and 2.1% in 2020. Core CPI is projected to be at 1.9% in 2018, rise to 2.1% in 2019 and stay there in 2020. Headline PCE was already at 2.0% in April and core CPE at 1.8%. There is chance of an upgrade in inflation forecasts. And if Fed does, it would be Dollar positive.
Finally, and most importantly, Fed projects policy rate to be at 2.1% at the end of 2018, 2.9% in 2019 and 3.4% in 2020. That is, one more hike only this year, and three more next. Any chance to this set of figures could trigger strong reactions in the greenback.
Fed’s March projections:
