FOMC likely to hike target range by 25 bps to 1.75-2.00 pct next week, no big changes seen in the dot plot: Danske Bank

The Federal Open Market Committee (FOMC) is expected to hike the target range by 25bp to 1.75-2.00 percent at its monetary policy meeting next week without making any big changes to the dot plot. The Fed is set to recognize that the Fed funds rate is close to the longer-run dot by stating 'monetary policy is modestly accommodative' (modestly being a new word), which is not a change in policy strategy; it just reflects the hiking cycle has come a long way.

The Fed has adopted, at least in the short run, a de facto price level target in the sense that it has explicitly stated that it can tolerate inflation to overshoot 2 percent temporarily, as inflation has undershot the 2 percent target for a long time.

The updated inflation projection is still expected to reflect this view and that it is unlikely that members, who signaled four hikes in March, are going to lift their dots from 4 to 5 hikes. The median dot for 2019 is likely unchanged at three more hikes and the Fed will continue to signal that it will raise the Fed funds rate above the natural rate, as it times to hit the brakes due to more expansionary fiscal policy.

While a Fed June hike is widely expected and as such should not give rise to a significant market reaction, a key issue will be whether markets sense that the Fed is closer to being done on hikes.

"We do not think that is the case and maintain that the market is pricing the Fed too softly beyond 2018. To the extent that the recent recoupling between the USD and US yields continues, this suggests that the USD will stay supported for some time still," the report added.

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