Fed rate hike should be a done deal – Danske Bank

Research Team at Danske Bank points out that the fairly upbeat assessment of the US economy by Fed Chair Janet Yellen recently has made the difference as she hinted strongly that the Fed would raise its benchmark rate, and Danske Bank have moved their rate hike call for the Fed forward from June to March.

Key Quotes

“We now expect three hikes in 2017 in line with the Fed’s median dot plot from December. A Fed rate hike should be a done deal, in our view.”  

“That said, we were a bit surprised by the sudden hawkishness of the Fed, as there were not many signs in the minutes from the latest meeting or Yellen’s hearing in Congress that the Fed was going to hike already in March. It seems that the Fed considers the meeting to be a window of opportunity due to strong economic data, a tight labour market, easy financial conditions and record-high stocks.”

“However, the Fed’s fairly positive assessment of the strength of the US economy seems to be shared by US equity markets. Over the past weeks, equity markets have taken another leap higher as we had called for, supported partly by strong economic releases both in the US and elsewhere.”

“Fixed income and oil markets seem less convinced about the upbeat assessment. Longterm yields have not climbed much since the initial rise after Trump’s election victory in November. As a result, we have seen a flattening of the yield curve in the US. Furthermore, inflation expectations are starting to head south and over the past two days, oil markets have seen a sharp sell-off, reminiscent of past occasions over the 2014-16 period, when the Fed turned more hawkish than had been priced into the market.”