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Fed: What to expect for monetary policy beyond the next hike? – SocGen

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 23, 2015.

  1. FXStreet_Team

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    FXStreet (Delhi) – Aneta Markowska, Research Analyst at Societe Generale, expects three hikes next year on the assumption that the inherent volatility in the data and the markets will cause the Fed to take a pass at one of the ‘live’ meetings.

    Key Quotes

    “We look for acceleration in the pace of hikes in 2017 as inflation approaches 2%, unemployment undershoots NAIRU and international headwinds (and thus dollar pressure) begin to dissipate. We believe that there are about 2-3 years left in this cycle which means that the Fed should be able to push the policy rate to a 2.5%-3.0% range. In the subsequent downturn, it is very likely that the rate will be cut back to zero.”

    “As for the balance sheet, we assume that the Fed will begin tapering reinvestments in 2017, with full run-off beginning in early 2018. This is fully consistent with Chair Yellen’s indications given today during the press conference. She noted that the Fed expects to keep a large balance sheet until rate normalization is well under way. Although she did not give a particular level, she noted that the Fed would like to have a buffer in terms of having raised rates to have some meaningful scope to respond to an adverse shock or to the next downturn.”

    “We take that to mean a fed funds target above 1%. The risk, in our view, is skewed toward even later balance sheet normalization. We believe it is reasonable to expect the next downturn around 2018/2019. In this scenario, the Fed would have to reverse its policy on reinvestment in a relatively short period of time. In this context, we would question the benefit of tapering them in the first place.”
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