Plenty of room for rate hikes by US Federal Reserve
KUALA LUMPUR: Research firms are expecting the US’ Federal Reserve to raise its target range by 25 basis points (bps) to 1.50 to 1.75 per cent during its Federal Open Markets Committee (FOMC) meeting ending today.
In line with market expectations, the team at AmBank Research said it placed a 90 per cent chance of a rate hike in March.
“However, we will be looking for two clues during the March FOMC meeting,” it forewarned in an analysis yesterday. “The essence of this meeting will be whether there will be a fourth rate hike. Also, we will be looking for any sign on policy normalisation.”
While the markets are currently looking at four rate hikes in total for 2018, AmBank expected the Fed to maintain the three-hike signal in total for 2018.
The firm’s first rate hike view was in March with a 90 per cent probability, followed by June (70 per cent probability) and the third in September (60 per cent probability).
“Meanwhile, we also believe there is room for a fourth rate hike. This could happen in December which we have placed a 25 per cent chance of it materialising,” it added.
“Room for us to raise the probability for a fourth rate will depend on several factors. First, it will be the tone of the US Fed chair, whether he is slanting towards more hawkish in the coming meeting though we expect him to reiterate that risks are “balanced” and will focus on inflation which is expected to rise gradually.
“The other indicators we will be watching closely are wage growth and the core inflation. Signs of wage growth firming up imply the demand-pull inflation is kicking in and should see core inflation rising. It will allow us to raise our probability for a fourth rate hike much higher.”
AmBank Research was hoping for some guidance from the Fed Reserve on its potential normalisation of the policy rate as it believed the normalisation rate should be around three per cent, which means there could be another two or three rate hikes in 2019.
It added that the number of rate hikes in 2019 will depend on the number of rate hikes in 2018.
Meanwhile, it was also of the view that a 25bps rate hike by the Fed in March will not have any major impact on the US dollar as “any material impact on the US dollar will depend on the tone of the Fed chair.”
“While a three-rate hike by the Fed will not have any significant impact on the US dollar as it has been well priced in, we feel a fourth hike should also be potentially factored into the movement of the US dollar,” it added.
“The impact will be more of a near term one, allowing the US dollar to strengthen in the region of one per cent.
“However, in our view, the key challenge to the USD will be Trump’s policy. The focus will be on how the president steers his “America first” agenda play. We expect this to influence the US dollar in the medium term.”
On that note, AmBank research expect the US dollar to settle around the 86–87 levels by end-2018 and around the 84–85 levels in 2019.
However, we will be looking for two clues during the March FOMC meeting. AmBank Research