U.S. Fed's Hike Pace: Danske Bank

Danske Bank notes its expectations on US Fed hike pace...

• We expect the realised hiking pace to be significantly faster with around 100bp in hikes per year. 
  
  
• This is half the pace of the 2004-2006 hiking cycle, which the Fed called a measured pace, and slightly slower than the pace implied by the March FOMC projections. 
  
  
• We expect the Fed funds rate to peak at 3.50% by end-2017, as lower potential GDP growth coupled with theFed's 2% target on inflation suggests a cap to the Fed funds rate around that level.
  
  
• Given the current market pricing, we see the largest potential for higher US rates in the 2- 5 year segment. While it is not unusual that the market is unable to fully price the extent of rate hikes going into a hiking cycle, the current divergence between (our expected) realised 3-month rates and the 3-month EUR/USD forward strip is unusually large. 
  
  
• This tells us that as we move closer to the first rate hike, the potential for higher 2-5 year rates is significant.