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US: The first hike in nearly a decade - Scotiabank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Derek Holt, Research Analyst at Scotiabank, suggests that the Federal Reserve is expected by the vast majority of financial markets economists in Bloomberg’s consensus survey to hike its federal funds target range from 0-25bps now to 25-50bps.

    Key Quotes

    “Here is a summary of our expectations.

    • A 25bps hike to the federal funds target range to 25-50bps as controlled by the FOMC.

    • An upgraded labour market assessment from “the pace of job gains slowed” to something acknowledging two solid gains since the August-September soft patch.

    • A continuation of data/state-dependent guidance on timing the next rate hike.

    • Dissenter risk is likely to remove Richmond Fed President Jeffrey Lacker who will support a hike and insert Chicago Fed President Charles Evans who opposes hiking at this juncture.

    • A change in the ‘dot plot’ that likely eliminates the negative rate forecast as Minneapolis Fed President Narayana Kocherlakota retires in January and by tradition skips the meeting before in favour of an alternate representative. On its own, this could put marginal upward pressure upon the median forecast for the federal funds rate by FOMC officials.

    • It is uncertain whether and to what extent this will be offset by lowered guidance on FOMC rate projections in future. In our view, it’s possible that the median ‘dot’ will be lowered in order to contain the market response that is still not priced with certainty for a hike next week. That said, market pricing for future Fed moves is already well under the median forecast of FOMC officials as it stands now.

    • Continued reinvestment of Treasury and MBS flows with a shift to partial reinvestment of both elements of the System Open Market Account (SOMA) expected over the first half of next year.

    • The day after — as guided in the July FOMC meeting minutes — the Interest on Excess Reserves will rise by 25bps to 0.5% and the rate on the overnight reverse repurchase facility will increase to 25bps. Both are expected to be announced in the post-meeting statement. The former sets the floor for lending between banks and the latter serves as the floor for lending in money markets.
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