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 …
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.
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