It is evident from the 2018 Fed Rate Hike Forecast, that Federal officials expect interest-rate increase and have raised their forecast for economic growth even as they stuck with a projection for three hikes come 2018.
14 December, Swissquote – The Federal Reserve opened the ball yesterday by raising borrowing costs. The central banks’ show will continue today with the SNB, Norges Bank, CBRT and ECB. As widely expected the Swiss National Bank didn’t change anything about its monetary policy set-up.
Similarly, the Norges Bank left unchanged the key rate at 0.50%. However, the Norwegian central bank signaled it would start hiking rate in autumn 2018. The krone surges 1.20% against the US dollar with USD/NOK sliding to 8.2265. EUR/NOK fell 1.30% to 9.72.
Busy day for central banks but little action expected
In Turkey, the CBRT should leave unchanged its three key interest rate. However, the market expects that the central bank will increase the late liquidity lending rate by 1% to 13.25%, therefore charging Turkish banks more if they need to borrow just before the market close.
Due to political interferences from the government, the central bank found another way to relieve the pressure on the TRY. The CBRT has the option not to provide any funding through its 1-week repurchase auction to local lenders, forcing them to borrow at a much higher rate through the late liquidity window.
In Europe, both the ECB and the BoE are holding their last meeting of the year. Given the fact that the former already trim by half its quantitative easing program back in October, Mario Draghi will most likely set back and relax. The situation is roughly the same the BoE as the central bank already increased borrowing costs back in November. Therefore, we expect little action as both central banks will not miss the opportunity to reiterate their cautious rhetoric regarding the inflation and growth outlook.
2018 Fed Rate Hike Forecast
As expected the Fed ends up its year by increasing rates to the window 1.25% – 1.50%. It is finally the third time in the year that the US Central Bank increases rates. According to the monetary policy statement, expectations on the job market are strong with unemployment rate should drop below 4% in 2018. On top of that Fed forecasts the growth to increase by 2.1% in 2018.
Now the Fed is on the line for another set of three rate hikes in 2018 which is something that was already predicted since last September. The pace of the rate hikes won’t accelerate from this year and as we mentioned several times in this newsletter, there is no reason for the Fed to do so as it would increase the pace of the rate hikes and it would likely create potentially massive disruption on many markets. We rather believe that the Fed will not be able to raise rates three times.
The only reason why the Fed promises so much rate hikes are the confidence they are trying to maintain in the dollar. The truth is that the Fed is not really in control of all the asset bubbles. The keywords from the Fed are “low inflation” while we believe that inflation is actually higher than what the Fed is using for deciding about the monetary policy (3% versus 2% in our view).
The Fed clearly needs stronger inflation to kill the debt without raising rates that would burst bubbles. There are bubbles in almost every US asset class now. As a result, our view for next year is bullish on the Eurodollar while the dollar may still enjoy a Christmas Rally until year-end on the fact that the “2017 Fed mission is accomplished”.
This article ‘ 2018 Fed Rate Hike Forecast ‘ was written by Arnaud Masset and Yann Quelenn, Market Analysts at Swissquote.
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