Fed could still hike in December – UOB

FX Strategists at UOB Group assessed yesterday’s FOMC meeting and the prospects for the next months.

Key Quotes

“No major surprise from the July FOMC as the Fed kept policy rate steady at 1-1.25% and a more dovish expectation that inflation “overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent” (from “running somewhat below 2 percent.” previously in June FOMC)”.

“No new insight on Fed’s rate hike trajectory but the FOMC now expects to announce its balance sheet reduction (BSR) “relatively soon." With the probability of another rate hike in September diminishing further, we shifted our next rate hike forecast to December 2017 FOMC while our BSR announcement expectation is moved forward to September 2017 FOMC. A caveat for the projection revisions is that the US debt ceiling limit issue is a non-event which remains our base case scenario”.

“Despite the projection revisions, our rates outlook remain intact as US yields are expected to drift in an upward trajectory albeit a shallow one given our assumption that FOMC officials will continue to be highly sensitive to any excessive fluctuations in financial conditions”.